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Pharmaceuticals – Initiating Coverage Sector Outlook
Overweight
Index performance
1m 3m 12m
BSE HC -6% -10% 43%
Sensex -2% -9% 3%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
BSETHC 15435
Relative performance
Find Spark Research on Bloomberg (SPAK <go>),
Thomson First Call, Reuters Knowledge and Factset
Page 1
Initiating Coverage
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
-10% 0%
10% 20% 30% 40% 50% 60% 70% 80%
Jun-1
4
Aug-1
4
Oct-
14
Dec-1
4
Feb-1
5
Apr-
15
Jun-1
5
Sensex
BSE Healthcare
It’s not the end of an era it’s just the start of a new one – Stronger and more robust
The top six Indian Pharmaceutical companies generated ~$11bn of cash flows over the past 5 years capitalizing
on the 2010-2014 patent cliff in the US market vis-a-vis just ~$2.3bn over the preceding 5 year period. Close to 25-30%
has been smartly invested into R&D which would help propel future growth. Not only has the R&D contribution as a
percentage of sales jumped (~5% in FY11 to ~7% in FY15), but over the past 5 years each company seems to have
narrowed down its areas of therapeutic focus to identify future growth drivers.
Specifically, in the US, Indian generics market share should catapult to 16% by FY18E from ~10% currently (see
page 6). Indian players have 25% market share in the recently launched generics (671 drugs analysed by us). Indians
have ANDA filings in almost all drugs where Para IV patent challenges have been filed and our analysis shows 1 out of
every 4 ANDAs filed with the USFDA is by an Indian company.
Moreover, we believe that with GDUFA timelines in place (USFDA targeting to drastically reduce approval backlogs by
2017) US sales of top Indian companies will nearly double by FY18E. We see Aurobindo and Lupin emerging as the
largest beneficiaries of this trigger (see page 7).
Beyond FY18E, our analysis shows Biosimilars space offers enough to keep the growth momentum going. M&A
analysis on Indian companies indicate that Sun, Lupin, Dr Reddy are capable of doing acquisitions > $15bn on
their net cash balance sheets today. The domestic market continues to be robust with favorable demographics and we
believe price control issues are over hyped.
We initiate coverage with a positive view and believe the sector should continue to generate superior returns.
Indian Pharma companies have the best ROEs, highest EPS CAGRs and lowest PEGs, (see page 16).
We have analysed all formulation coverage companies (9 of them out of total 12 coverage stocks) on a common
qualitative and quantitative framework. At one end, Sun Pharma and Lupin emerge Rank 1 and 2, respectively on
sum total weighted averages, Aurobindo and Glenmark (our top picks) emerge 4th and 5th, respectively, just behind
a close 3rd Dr Reddy.
Stock Calls
We have a BUY on Lupin and Dr Reddy on long term fundamentals but advocate caution on Sun Pharma because of
Halol plant related event risk in near term.
Aurobindo Pharma and Glenmark Pharma are our top picks from mid to large category with strong EPS CAGRs and
multiple re-rating possibilities. We like Ajanta Pharma’s business model but in the near term valuations cap upside.
We advise a SELL on Ipca as we believe the stock has been reduced to a domestic market play with huge costs
associated in regulated markets. We do not see a resolution of import alert over the next 2 years. We also initiate on
Neuland Labs as a small cap multi-bagger stock idea over a 2-3 year time horizon.
Pharmaceuticals – Initiating Coverage Sector Outlook
Overweight
Page 2
Pharmaceuticals coverage universe
Source: Company, Spark Capital Research
Financial Summary
Company Revenues (Rs. mn) EBITDA (Rs. mn) Adj. PAT (Rs. Mn) Adj. EPS (Rs.) EBITDA Margin
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
Ajanta Pharma 14,806 17,536 21,196 5,052 5,971 7,221 3,183 3,842 4,834 35.9 43.3 54.5 34% 34% 34%
Aurobindo Pharma 121,205 139,930 160,520 25,636 32,880 39,719 16,194 20,765 25,365 55.5 71.1 86.9 21% 23% 25%
Divi's Laboratories 31,149 35,700 43,170 11,653 13,729 16,792 8,515 10,216 12,616 64.2 77.0 95.0 37% 38% 39%
Dr Reddy's Lab 148,189 166,929 194,910 33,535 39,319 45,908 22,179 25,923 30,774 130.3 152.3 180.8 23% 24% 24%
Glenmark Pharma 66,448 80,609 98,992 14,466 18,943 24,253 8,025 11,212 15,463 28.5 39.8 54.9 22% 24% 25%
Granules India 12,929 15,562 18,333 2,086 2,776 3,414 909 1,239 1,631 4.5 6.1 8.1 16% 18% 19%
Indoco Remedies 8,570 10,390 13,134 1,655 2,130 2,824 828 1,118 1,654 9.0 12.1 18.0 19% 21% 22%
Ipca Laboratories 31,418 35,952 41,680 5,291 6,135 8,365 2,509 3,061 4,741 19.9 24.3 37.6 17% 17% 20%
Lupin 127,700 149,423 183,160 36,196 42,569 55,099 24,032 28,326 36,894 53.5 63.0 82.1 28% 28% 30%
Neuland Laboratories 4,699 5,702 7,065 674 884 1,159 159 282 456 17.8 31.4 50.9 14% 16% 16%
Sun Pharmaceuticals 2,74,334 2,97,196 3,56,169 86,093 1,03,858 1,33,433 53,241 64,529 86,727 22.1 26.8 36.0 31% 35% 37%
Unichem Laboratories 12,018 13,554 16,037 1,013 1,381 2,009 754 809 1,290 8.3 8.9 14.3 8% 10% 13%
Company P/E EV/EBITDA RoE CMP
(Rs.)
M.Cap (Rs.
Mn)
Target %Absolut
e return Rating
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E P/E Price
Ajanta Pharma 40.5 33.6 26.7 25.3 21.3 17.3 44% 39% 36% 1,456 1,29,065 25 1,363 -6% Reduce
Aurobindo Pharma 23.0 18.0 14.7 15.9 12.3 9.9 36% 34% 31% 1,278 3,73,178 20 1,737 36% Buy
Divi's Laboratories 27.5 22.9 18.6 19.4 16.4 13.2 26% 27% 27% 1,764 2,34,143 23 2,186 24% Buy
Dr Reddy's Lab 25.5 21.8 18.3 16.9 14.3 11.9 23% 21% 21% 3,317 5,64,686 22 3,977 20% Buy
Glenmark Pharma 30.9 22.1 16.0 18.6 13.6 10.3 27% 27% 25% 880 2,38,392 20 1,120 27% Buy
Granules India 17.3 12.7 9.6 9.3 7.1 5.4 13% 24% 23% 78 15,722 12 97 24% Add
Indoco Remedies 39.3 29.1 19.7 20.1 15.7 11.6 17% 19% 23% 353 32,529 20 360 2% Add
Ipca Laboratories 32.4 26.5 17.1 16.7 14.2 10.2 12% 13% 18% 644 81,273 14 526 -18% Sell
Lupin 33.1 28.1 21.6 21.5 18.1 13.7 30% 28% 29% 1,772 7,96,514 25 2,052 16% Buy
Neuland Laboratories 19.6 11.1 6.9 7.2 6.4 5.3 11% 17% 24% 350 3,133 12 611 75% Buy
Sun Pharmaceuticals 36.8 30.4 22.6 18.9 14.8 10.9 23% 22% 24% 814 16,85,957 25 901 11% Add
Unichem Laboratories 21.6 20.1 12.6 15.7 11.9 7.7 9% 9% 13% 180 16,282 16 228 27% Buy
Pharmaceuticals – Initiating Coverage Sector Outlook
Overweight
Serial. No Sectors Page
A USA 4
B India 12
C Emerging markets 14
D Peer Valuation 16
E Business and Financial Analysis 17
1 Ajanta Pharma 26
2 Aurobindo Pharma 33
3 Divi’s Laboratories 43
4 Dr Reddy’s Laboratories 49
5 Glenmark Pharmaceuticals 56
6 Granules India 65
7 Indoco Remedies 71
8 Ipca Laboratories 78
9 Lupin 84
10 Neuland Laboratories 91
11 Sun Pharma 97
12 Unichem Laboratories 105
Table of Contents
Page 4
USA
Page 5
USA
Cash flow generation has helped R&D filings which leads to stronger growth ahead
Cash flows R&D spend ↑
Source: Company, Spark Capital Research; Companies
considered Sun, Lupin, DRL, Aurobindo, Cadila, Glenmark
Another patent cliff awaits us
Source: IMS, Spark Capital Research
Pool of ANDAs to capitalize on expiries ahead
Source: Company, Spark Capital Research; Companies
considered Sun, Lupin, DRL, Aurobindo, Cadila, Glenmark
Indian market share to reach 16% by FY18E in US
Source: IMS, Spark Capital Research
Well thought and planned areas of focus for each company
Source: Company, Spark Capital Research
Targeted
GI# Inhalers Topical Ophthalmic
LA
Injection*
Trans-
dermal Nasal Others^
Market Size ($ bn) 17 17 7 7 6 4.7 3 24
Sun Pharma Targeting Selling Selling Selling Selling OC, CS, Peptides
Lupin Targeting Targeting Targeting Selling Targeting Targeting OC
Dr Reddy's Selling Targeting Targeting Peptides
Cipla Targeting Targeting Targeting -
Cadila Targeting Targeting Selling Targeting Targeting -
Aurobindo Targeting CS, Penem, Peptides,
Hormones
Glenmark Targeting Selling CS, OC, Hormones
# Targeted Gastrointestinal products, * Long acting injectables, ̂includes
1,2
41
1,6
29
1,7
88
2,0
31
2,5
32
2,6
93
268
397
483
593
741
867
0
500
1,000
1,500
2,000
2,500
3,000
FY10 FY11 FY12 FY13 FY14 FY15
US
$ M
n
CFO (Pre R&D) R&D
27 29 32 34 38 40
43 50
81
5% 5% 6% 5%
7% 8%
10% 10%
16%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
20
40
60
80
100
2006
2007
2008
2009
2010
2011
2012
2013
2018E
US
$ B
n
US Generic Market Indian Players - Market share (%)
28
19
11
21 20
16
-
5
10
15
20
25
30
2015 2016 2017 2018 2019 2020
US
$ B
n
Patent Expiries
131 140 124
142
198
155
0
50
100
150
200
250
FY10 FY11 FY12 FY13 FY14 FY15
No
. O
f fi
lin
gs
ANDA filings
Page 6
USA
1 out of every 4 pending ANDAs by Indian (CY14)
Source: USFDA, Company, Spark Capital Research;
*ANDAs as on CY14
25% Indian market share in recent US launches
Source: Spark Capital Research; Analyzed 671 products of
Indian pharma companies
25%
75%
Indian companies Other companies
High filing share in select 43 drugs worth $40 bn
Source: Spark Capital Research
CRs bunched up already – ANDAs to follow
Source: USFDA
FY12 FY13 FY14
ANDA approvals 517 440 409
PAS approvals 275 535 659
Tentative approval (TA) 102 95 91
Complete Response (CR) 84 1251 1254
Total actions 978 2321 2413
Indian generics sales in the US to more than double in 3 years
US Generic
market Size
Share of Indian
companies
50.0
81.3
5.2
13.0
US generic market size expected to reach $
81.3 bn by FY18E
Indian companies sales to go up to $13 bn
Market share of Indian companies to go up to
16% from 10%
FY13
FY18E
US$ 114 bn worth of drugs are going off patent in
2015-2020
Analysed 43 products with market size of US$ 40
bn, where Indian companies have presence
For 32 out of the 43 products, Indian ANDA filings
are >25%
Total ANDAs: 4000*
Indian Co.: 943
US$ Bn 6
9
17
11 10
0
2
4
6
8
10
12
14
16
18
>75% 50%-75% 25%-50% <25% Indian FTFs
No
. o
f p
rod
uc
ts
10%
16%
MS
24%
76%
Indian Companies Others
Page 7
USA
Per ANDA contribution for Indian companies improved significantly already
Source: Company, Spark Capital Research; considered Aurobindo, DRL, Lupin, Sun,
Ranbaxy, Cadila, Glenmark and Torrent calculations
GDUFA requirements led to bunching up of filings in CY14
Source: USFDA
Sharp reduction in timelines for approvals indicated by FDA
Source: USFDA
Sales to nearly double for Indian filers by FY18E on GDUFA targets
Source: Company, Spark Capital Research; * assumes GDUFA to achieve 60% approval for
pending ANDAs within 12 months; ** assumes 90% approval for pending ANDAs within 12
months; Actual GDUFA target in 90% clearance in 10 months by 2017
GDUFA implementation to deliver bumper growth for Indian filers ahead – Aurobindo and Lupin to be biggest beneficiary
30 32 31 32
42
10
0
5
10
15
20
25
30
35
40
45
CY10 CY11 CY12 CY13 CY14 CY17*
No
. o
f M
on
ths
827
850
798
885
1077
925
1418
56% 57% 53% 54%
51% 51%
32%
0%
10%
20%
30%
40%
50%
60%
70%
0
200
400
600
800
1,000
1,200
1,400
1,600
CY08 CY09 CY10 CY11 CY12 CY13 CY14
No
. o
f F
ilin
gs
Filings % approvals to filings
3.8 4.2
4.5
5.4 5.9
6.3
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY10 FY11 FY12 FY13 FY14 FY15
US
$ M
n
1.9
1.3
1.8
1.3
1.5
1.5
2.4
1.6
2.3
1.4
1.8
1.8
0
0.5
1
1.5
2
2.5
3
Aurobindo Dr Reddy's Lupin Sun Glenmark Total
US
sale
s X
tim
es
FY15 FY18E* FY18E**
Page 8
USA
Indian players ready to capitalize with filings in place
Source: Company, Bloomberg, Spark Capital Research
>10% price increases taken in CY14 for 39% of total 3500 drugs analyzed; 6% drugs see >100% price increase!
Source: Company, Spark Capital Research
4%
11%13%
23%
19%
8% 8%6% 6%
2%
10% 9%
12%10%
18%
22%
11%
6%
0%
5%
10%
15%
20%
25%
-25% to -100% -10% to -25% -5% to -10% 0% to -5% 0% to 5% 5% to 10% 10% to 25% 25% to 100% More than 100%
Dec'13 Vs Dec'12 Dec'14 Vs Dec'13
Analysis of 3500 generic drug
prices over last 3 years
indicates..
>10% price hikes happened
for 39% of total drugs in CY14
vs. 20% in CY13
Around 28% of drugs
witnessed 0-10% price hikes in
last two year
For 12% of drugs, price
declined up to 5% in CY14
against 23% in CY13
>10% price decline happened
for 12% of total drugs in CY14
vs. 15% in CY13
Price increases giving another important leg to the growth
Year Brand Market size
$Mn Indian players
FY16 Nexium 6,000 Aurobindo, Dr Reddy's,
Lupin
FY16 Gleevec 2,000 Sun Pharma
FY16 Abilify 7,800 Torrent, Aurobindo, Sun
Pharma, Cadila, Alembic
FY16 Copaxone
20mg 1,500
Natco Pharma and Dr
Reddy's
FY16 Lipoderm 1,200 Cadila
FY16 Pristiq 600 Cadila
FY16 Aloxi 420 Dr Reddy's
FY16 Renvela 450 Lupin
FY16 Zyvox 450 Glenmark
FY16 Lialda 380 Cadila
Year Brand Market
size $Mn Indian players
FY16 Coreg CR 300 Sun Pharma, Lupin
FY17 Crestor 3,100 Sun Pharma, Aurobindo,
Glenmark
FY17 Namenda 1,800
Aurobindo, Jubilant, Torrent,
Unichem, Wockhardt, Alembic,
Lupin
FY17 Zetia 1,300 Glenmark
FY17 Seroquel
XR 800 Torrent, Lupin
FY17 Alimta 1,230 Sun Pharma
FY17 Prezista 800 Lupin
FY17 Norvir 500 Aurobindo
FY17 Epzicom 500 Lupin
FY17 Nuvigil 400 Lupin
Year Brand Market size
$Mn Indian players
FY17 Strattera 384
Sun Pharma, Glenmark,
Cadila, Aurobindo, Dr
Reddy's
FY17 Multaq 320 Glenmark
FY17 Kaletra 258 Aurobindo, Cipla
FY17 Zegerid 35 Dr Reddy's, Cadila
FY18 Truvada 2,000 Aurobindo, Lupin
FY18 Viagra 1,132 Dr Reddy's, Torrent
FY18 Reyataz 770 Aurobindo
FY18 Viread 550 Aurobindo, Lupin, Aurobindo,
Cipla
FY18 Solodyn 370 Cadila
FY18 Tykerb 114 Lupin
Page 9
USA
Biosimilars: Indian Pharma growth story to continue even beyond our estimates of FY18
Top Biologics & Patent expiries
Source: Company, Spark Capital Research
Biologics Patent Cliff
Source: Spark Capital Research
Brand APIs
Global
sales
US$ bn
Patent expiry
US EU
Humira Adalimumab 12.5 Dec-16 Apr-18
Remicade Infliximab 9.2 Sep-18 Expired
Rituxan Rituximab 8.7 Sep-16 Expired
Enbrel Etanercept 8.5 Expired Expired
Lantus Glargine 7.3 Expired Expired
Avastin Bevacizumab 6.9 Jul-19 Jan-22
Herceptin Trastuzumab 6.8 Jul-19 Expired
Neulasta Pegfligrastim 4.5 Expired Aug-17
Avonex Interferon
beta-1a 3.0 2019 2025
Novolog Insulin Aspart
Recombinant 2.2 Expired Expired
Epogen Epoetin Alfa 2.1 Expired Expired
Aranesp Darbepoetin 2.0 May-24 Jul-16
Erbitux Cetuximab 1.2 Feb-16 Expired
Synagis Pavilizumab 1.2 Oct-15 Aug-15
Neupogen Fligrastim 1.0 Expired Expired
Apidra Insulin
glulisine 0.4 Jun-18 Sep-19
Biosimilar opportunity estimated at US$ 44 Bn in US by 2018E
Source: Sandoz presentation, Spark Capital Research
15 13
5
29
0
5
10
15
20
25
30
35
2015 2016 2017 2018
US
$ B
n
Biologics
Single drug revenue potential very sizeable
Source: Spark Capital Research
Brand revenue at expiry (US$ Mn) 3,500
Approved players 4
Assuming high price erosion (conservative
view) 60%
Revenue potential from drug for each player
(US$ Mn) 350
Patented 87%
Off patent- US
10%
Off patent- Rest of world 3%
Patented 61%
Off patent- US
23%
Off patent- Rest of world 16%
2018E 2013
US$ 124 Bn US$ 190 Bn
Page 10
USA
TEVA MYLAN ACTAVIS
Year Acquired Cost Rationale
2003 Sicor 3 Injectable pipeline & capacity
and API capacity
2006 Ivax 7.5
Respiratory business +
Proprietary technologies; 122
pending ANDAs
2009 Barr Pharma 8.8 Women Health + Proprietary
products
2010 Ratiopharm 5
Biosimilar pipeline + R&D team;
Became leader in many Europe
countries
2011 Cephalon 6.5
Enhanced Branded product
basket in CNS (Provigil, Nuvigil)
and Oncology (Trenda)
What it took for biggies to become BIG, are the Indians on the right track? Yes!
Year Acquired Cost Rationale
2007 Matrix 0.9 API manufacturing capabilities
2008
Merck
Generics
product
basket
6.6
Geographic reach (90 countries
presence); R&D &
manufacturing capabilities
2010 Bioniche 0.6 Injectable business +
Institutional business in US
2011
Respiratory
platform
from Pfizer
NA Platform for developing Advair
and others
2013 Agila
Specialties 1.6
Injectable capacity with healthy
pipeline
2014
Developed
market
branded
generic
business
from Abbott
5.6
Improves ex-US tax structure;
2000+ Representatives;
Branded generics product
basket
Year Acquired Cost Rationale
2006 ANDRx 1.5 Controlled release technology;
Generic distributions
2009 Arrow 1.8 Improved presence in Ex-US,
Biologic/Biosimilar base
2011 Specifar 0.5 Improved manufacturing base
& distribution in Europe
2012 Actavis
Group 6
3rd largest global generic
company; 10% market share in
US
2013 Warner
Chilcott 9
Specialty brand products and
pipeline particularly in Women
Health, Gastroenterology,
Urology and Dermatology; Irish
domicile/Tax efficiency
2014 Forest
Laboratories 21
Improved product basket in
CNS, CVS, GI, Respiratory and
Cystic fibrosis
2014 Allergan 65 Ophthalmic
No M&As in last 3 years, Mcap
remains flat over 5 years M.cap: 1.3x in 4 Yr
0
10
20
30
40
50
60
0
5
10
15
20
25
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US
$ B
n
US
$ B
n
Base sales Acquisitions - sales Mcap
0
5
10
15
20
25
0
2
4
6
8
10
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US
$ B
n
US
$ b
n
Base sales Acquisition sales Mcap
0
10
20
30
40
50
60
70
80
0
2
4
6
8
10
12
14
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US
$. B
n
US
$. B
n
Base sales Acquisition sales Mcap
Page 11
USA
Total M&A deals size in the last 10 years
Source: Company, Spark Capital Research
Majority deals by top 3 Indian companies are for technologies
Source: Company, Spark Capital Research
Relatively lower ANDA pipeline compared to biggies
Source: Company, Spark Capital Research;
Top 3 players are capable of doing acquisitions >$15Bn
Source: Company, Spark Capital Research; *Assuming 10% equity dilution for Lupin & Sun,
**Debt raising capability was calculated on assumption i) Debt to EBITDA of 2.5x and ii)
Acquired business’ EBITDA is 20% of acquirer’s EBITDA
Company Year Type Acquired /Partner Rationale
Lupin FY15 JV YL Biologics Biosimilars development
Lupin FY14 M&A Laboratorios Grin SA de CV Mexico entry + Ophthalmic presence
Lupin FY14 M&A Nanomi BV Complex injectables
Lupin FY12 M&A I'rom Pharmaceutical Co Ltd Injectables presence in Japan
Sun Pharma FY15 M&A GSK opiates business Control substances
Sun Pharma FY14 M&A Pharmalucence Inc Sterile injectables
Sun Pharma FY13 M&A URL Pharma Inc Expanded US generic drug basket
Sun Pharma FY15 M&A Ranbaxy Laboratories Ltd Emerging market presence
Sun Pharma FY14 JV Intrexon Development of Ophthalmology products
Sun Pharma Tie up Merck tie up In-licensed phase-3 psoriasis molecule
Dr Reddy's FY13 M&A OctoPlus NV Complex injectables
Dr Reddy's FY15 M&A Novartis' Habitrol brand Brand in US
Dr Reddy's FY16 M&A USB Indian brands portfolio Enhancement of Indian drug basket
Indian players have remained conservative in M&As so far – It’s a question of WHEN they will, not WHETHER they will..
105
34
16
5 1 0 0
20
40
60
80
100
120
Actavis Teva Mylan Sun Pharma Dr Reddy's Lupin
US
$ B
n
1
4
1
4
2
2
0
1
2
3
4
5
6
7
8
9
Sun Pharma Lupin Dr Reddy
US
$ B
n
Cash in Hand Equity Dilution* Debt**
230
120
283
159
99
68
0
50
100
150
200
250
300
Actavis Teva Mylan Sun Pharma Lupin Dr Reddy's
No
. o
f A
ND
As
Page 12
INDIA
Page 13
INDIA
Price control issues over hyped; Volume growth is THE most important metric
Price controls impacted growth in FY13 & FY14….
Source: Spark Capital Research
… but strong increase in volumes seen in FY15
Source: Spark Capital Research
Chronic therapies remains strong
Source: Spark Capital Research
Chronic penetration steadily improving
Source: Spark Capital Research
Acute & Chronic profile of our coverage
Source: Spark Capital Research
Prefer domestic companies over MNCs
Source: Spark Capital Research; Companies considered for
calculations – Sun, Cipla, Cadila, Lupin, DRL, GSK, Pfizer, Sanofi, Abbott and
Novartis
Value
(Rs. Bn) % total
Growth (%)
FY12 FY13 FY14 FY15
Anti-infective 138 16% 12.0 9.0 1.0 9.7
Cardiac 107 12% 18.0 15.0 9.0 13.0
GI 99 12% 13.0 14.0 6.0 14.2
Vitamin 78 9% 20.0 14.0 6.0 12.2
Respiratory 68 8% 13.0 9.0 9.0 14.1
Anti Diabetic 67 8% 27.0 18.0 15.0 25.0
Pain 60 7% 12.0 7.0 4.0 11.3
CNS 52 6% 16.0 12.0 8.0 9.3
Derma 50 6% 19.0 14.0 11.0 16.6
Total 864 100 15.0 11.6 6.4 12.9
Last 5 yr growth of MNCs companies is mere 7% v/s strong
growth of ~15% by Indian companies
100% privately held entities remain biggest risk
High product concentration: Percentage of sales from top
10 products for leading domestic companies is 26% vs.
52% for MNC companies
Compulsory Licensing remains a big threat – Natco
received CS for Bayer Nexavar
Drug pipeline of parent MNCs choking
Scapegoat of all regulatory action by Government - Anti
MNC lobby, populism factor, Swadeshi - Videshi
Delisting/ Buyback opportunities: Only positive for MNC
investors as low free float creates a delisting case
Depreciation of rupee hits margins as MNC companies
import 20-30% of sales on an average
560
644
719
765
864
12.6
14.9
11.6
6.4
12.9
0
2
4
6
8
10
12
14
16
0
200
400
600
800
1,000
FY11 FY12 FY13 FY14 FY15
Rs. B
n
Indian Pharma Growth (%)
2.0 2.4 3.9
2.2 3.7
7.2 8.0 4.2
1.1
6.3
3.4
4.5
3.5
3.1
2.9
0
2
4
6
8
10
12
14
16
FY11 FY12 FY13 FY14 FY15
(%)
Price Volume New product launches
51% 70% 63%
93% 73%
53% 57% 42%
49% 30% 37%
7% 27%
47% 43% 58%
Aja
nta
DR
L
Gle
nm
ark
Indoco
Ipca
Lupin
Sun
Unic
hem
Acute Chronic
73% 73% 72% 71% 70%
27% 27% 28% 29% 30%
FY11 FY12 FY13 FY14 FY15
Acute Chronic
Page 14
Emerging Markets
Page 15
Emerging Markets
0
50
100
150
200
250
300
350
400
450
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
US
$ M
n
Emerging markets to grow double the growth rate of developed markets
Source: IMS Health Market Prognosis, September 2014, Spark Capital Research
EMs: Similar characteristics to Indian markets, Indian Cos. are best placed to capitalize
Generic penetration to improve in EMs
Source: IMS Health, Spark Capital Research
Currency fluctuation impacts growth; but volume growth remains good
Source: Bloomberg, Spark Capital Research; Indexed to 100 , 28-03-2014 is base date for
calculation
Strong foothold across different countries amongst all players
Source: Company, Spark Capital Research;
Company % of total
sales
CAGR Key Geographies
FY11-15 FY15-17E
Ajanta 67% 32% 22.3% Africa, CIS, Middle East, South East Asia
Aurobindo 5% 30% 20.2% Brazil, China, Australia, New Zeland
Dr Reddy's 21% 21% 5.2% Russia, CIS & Venezuela, China
Glenmark 25% 26% 19.5% Asia, Africa & Russia
Indoco 29% 15% 7.1% South East Asia, Africa, LatAm & CIS
Ipca 27% 30% 26.0% Africa, CIS, New Zealand, Australia
Lupin 9% 25% 39.3% South Africa, LatAm, Australia & Philippines
Sun 11% 33% 14.3% Brazil, CIS, Africa & Asia Pacific
Unichem 16% 17% 20.0% LatAm, South Africa & CIS
31 26
57 52
58 63
27 31
11 11 16 17
0
20
40
60
80
100
2012 2018E 2012 2018E
Pharma emerging RoW
(%)
Brand Generic Others
40
50
60
70
80
90
100
110
120
Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15
Ind
exed
CHFINR AUDINR BRLINR ZARINR RUBINR
Page 16
Peer Valuation
Better CAGRs, higher ROEs, lower PEGs of Indians versus global players; Chinese valuations extremely rich!
Source: Bloomberg, Spark Capital Research, *PE/g calculated on FY15 trailing PE and FY15-17E EPS CAGR
USA US$ MN Sales Net Profit CY14 CY15 CY15 PE/g*
Teva 50,829 -3% 20% 12 17 10 0.85
Mylan 34,572 16% 14% 14 20 14 1.37
Actavis 117,761 37% 24% -6 21 17 0.90
Hospira 15,263 6% 14% 10 34 18 2.37
Impax 3,247 24% 31% 5 34 17 1.11
Perrigo 28,631 23% 16% 2 31 21 1.86
Shire 51,257 9% 52% 49 44 17 0.86
Pfizer 210,038 2% 2% 13 15 11 7.41
GSK 106,667 4% 78% 145 77 12 0.98
Novartis 272,545 0% 15% 28 25 8 1.60
Eli Lilly 82,465 4% 12% 13 27 16 2.18
Mean 11% 25% 26 31 15 1.95
Median 6% 16% 13 27 16 1.37
Means Sales CAGR
15-17E
PAT CAGR
15-17E FY15 ROE FY15 PE
FY16 EV /
EBITDA PE/g*
Indian 19% 31% 24 29 15 1.10
US 11% 25% 26 31 15 1.95
Chinese 21% 27% 17 63 34 2.45
Medians Sales CAGR
15-17E
PAT CAGR
15-17E FY15 ROE FY15 PE
FY16 EV /
EBITDA PE/g*
Indian 19% 26% 23 28 15 1.03
US 6% 16% 13 27 16 1.37
Chinese 21% 27% 16 61 33 2.19
Company M. Cap
US$ MN
Sales CAGR
15-17E
PAT CAGR
15-17E
FY15
ROE
FY15
PE
FY16 EV /
EBITDA PE/g*
Ajanta Pharma 2,054 21% 25% 43 41 21 1.67
Aurobindo Pharma 6,375 15% 22% 34 25 14 1.10
Divi's Laboratories 3,941 20% 24% 26 29 17 1.20
Dr Reddy's Lab 9,744 13% 17% 22 27 16 1.58
Glenmark Pharma 3,755 20% 39% 21 32 15 0.82
Granules India 280 18% 31% 23 19 8 0.61
Indoco Remedies 571 22% 43% 18 41 16 0.96
Ipca Laboratories 1,333 16% 27% 17 24 11 0.89
Lupin 12,708 18% 19% 30 33 18 1.76
Neuland Lab 52 22% 65% 11 20 6 0.30
Sun Pharma 38,583 25% 19% 28 33 23 1.73
Unichem Lab 287 14% 40% 9 24 11 0.60
Mean 19% 31% 24 29 15 1.10
Median 19% 26% 23 28 15 1.03
China US$ MN Sales Net Profit CY14 CY15 CY15 PE/g*
Kangmei Pharma 17,795 27% 28% 18 48 27 1.75
Jiangsu Hengrui 14,827 26% 32% 22 61 34 1.90
Shanghai Fosun 12,607 20% 22% 13 39 38 1.78
Tasly Pharma 9,382 15% 25% 26 41 23 1.66
Beijing Tongrentang 9,064 13% 15% 13 71 30 4.79
Guangzhou Baiyunshan 8,781 14% 21% 16 50 32 2.34
Zhangzhou
Pientzehuang 5,367 29% 23% 16 76 53 3.29
Tonghua Dongbao 5,346 25% 40% 15 119 47 3.02
Zhejiang Conba 4,768 18% 15% 20 44 27 2.90
Guizhou Yibai 4,395 23% 28% 15 57 30 2.02
Zhejiang Huahai 3,688 26% 47% 10 86 33 1.81
Jiangsu Kanion 3,285 20% 28% 15 62 37 2.19
Mean 21% 27% 17 63 34 2.45
Median 21% 27% 16 61 33 2.19
Unlike popular opinion, truth is Indian companies trade relatively cheaper to global peers!
Page 17
Business and Financial Analysis
Page 18
Business and Financial Analysis
Critical Success Factors
Parameters Regulatory compliance R&D Portfolio Complexity Market coverage Management
Weightage 25% 25% 20% 20% 10%
Su
b-c
rite
ria
Past adverse actions R&D as a % of sales Complex therapeutic
categories presence Developed market presence
Expertise and experience of
top management
Consultants / proactive
cleansing NDDS / NCE R&D
Complex delivery platform
capabilities B2B vs. B2C
2nd Generation promoter
presence
Plant sales diversification /
No. of plants Areas of R&D spend
Limited competition launches
in the past including FTFs
Front end presence in
emerging / ROW markets Corporate governance
Geographical diversification of
plants Biosimilars spend Strength of brands
Geographical diversification of
sales Promoter Holding
Financial Health (Weighted average of FY13-17E)
Parameters Cash Generation Performance & Return
Ratios Valuation Metrics Growth & Margins Leverage and WC Ratios
Weightage 25% 25% 20% 20% 10%
Su
b-c
rite
ria
OCF / Sales ROE P/E Sales Growth Debt / Equity
FCF / Sales ROIC EV/EBITDA EBITDA Margins Debt / EBITDA
Fixed Asset Turnover P/B EPS Growth WC cycle
Source: Spark Capital Research
Page 19
Business and Financial Analysis
Combined Rankings Ranking by Critical Success Factors
Company/Parameters Regulatory
Compliance R&D
Existing
Portfolio
complexity
Market
coverage Management Overall
Ajanta Pharma 5 5 6 4 4 6
Aurobindo Pharma 3 7 5 6 6 5
Dr Reddy's Laboratories 2 1 3 5 3 3
Glenmark Pharma 4 3 4 3 5 4
Indoco Remedies 8 8 7 7 8 7
Ipca Laboratories 9 6 8 8 7 8
Lupin 1 2 1 2 1 1
Sun Pharmaceuticals 6 4 1 1 2 2
Unichem Laboratories 7 9 9 9 9 9
Ranking by Financial Parameters
Company/Parameters Cash
Generation
Performance &
Return ratios
Valuation
metrics
Growth &
Margins
Leverage and
WC ratios Overall
Ajanta Pharma 2 1 9 1 1 4
Aurobindo Pharma 7 2 2 2 2 2
Dr Reddy's Laboratories 5 7 3 8 8 6
Glenmark Pharma 6 4 5 6 6 5
Indoco Remedies 8 6 8 5 5 8
Ipca Laboratories 9 8 4 7 7 7
Lupin 3 3 7 4 4 3
Sun Pharmaceuticals 1 5 6 3 3 1
Unichem Laboratories 4 9 1 9 9 9
Source: Company, Spark Capital Research
1
2
3
4
5
6
7
8
9
Page 20
Business and Financial Analysis
AJANTA
GLENMARK
INDOCO
LUPIN
AUROBINDO
DR REDDY’S
IPCA
SUN
UNICHEM
AJANTA
AUROBINDO
DR REDDY’S
GLENMARK
INDOCO
IPCA
LUPIN
SUN PHARMA
UNICHEM
Regulatory Compliance R&D
Resolved warning letter issues in only 8 months
USFDA inspected and cleared 5 facilities in FY15
Total 6 USFDA approved plants
12 formulation facilities - India (7), USA (2) and UK (1)
10 USFDA approved plants (API + formulation)
No observations found in recent FDA inspections at Unit
7, Unit 9 and Unit 11
22 manufacturing facilities (11 facilities each for API and
formulations) across India, USA and Brazil
11 formulation facilities across 3 continents
No regulatory issues so far
No regulatory issues so far
US presence yet to scale up
Karkhadi Import alert, Halol (unresolved 483s) and 3
facilities of acquired Ranbaxy under import alert
High geographical diversification of plants (45 facilities
across globe)
High plant concentration risk
No regulatory issues in the past
High facility concentration (Only one sterile facility &
majority of growth dependent on the same)
Previous 483 had a long list of observations
3 facilities under import alert
Highest R&D cost as a % to sales (11.8% in FY15)
among peers
Robust pipeline of complex injectables
Building healthy biosimilars pipeline
Building niche pipeline in Respiratory, dermatology and
Ophthalmic
R & D cost as a % to sales stands at ~8.7% in FY15
Development of 10 biosimilars just started
Developing new molecules including 3 NCE and 4 NBE
High spend on dermatology space for US; 10.2% R&D as
a % of sale in FY15
Strong presence in Topicals, Ophthalmic and complex
injectables
Not developing any biosimilars; MK-3222 inlicensed
Focus on Novel delivery system products
US R&D strength yet to be known
Lower R&D cost as it is developing plain vanilla generics
No plans to develop Biosimilars
505 b(2) projects are currently on hold
Not developing any Biosimilars/ NCE products
Lower R&D cost as % to sales (3%) but spending majorly
on injectables, oncology, hormonals and peptides
Not spending on differentiated product basket in India
Low R&D spend, bulk of which is capitalized
Building sterile pipeline for the US market
Developing only plain vanilla products resulting in low
R&D cost (5% of sales)
No plans for novel product basket
RANK METER
Source: Company, Spark Capital Research
Page 21
Business and Financial Analysis
UNICHEM
IPCA
INDOCO
AJANTA
AUROBINDO
GLENMARK
AJANTA
DR REDDY’S
GLENMARK
LUPIN
SUN PHARMA
Portfolio Complexity Market Coverage
AUROBINDO
DR REDDY’S
Robust product basket in the niche therapies like topicals, Opthalmic,
oral contraceptives, nasal and injectables etc
Strong track record of launching differentiated/FTFs products like
gDoxil, gProtonix etc
Presence in US branded business
Vertically integrated in OC segment
Strong injectable product basket- Injectable contributes 27% of US
sales
Strong track record of monetizing FTF opportunities
Healthy product pipeline in dermatology, control substances and Oral
contraceptives
FTF opportunities in sight
Increasing presence in injectables, oncology, hormonals, penems and
peptides
No presence in branded segments across geographies
Presence in few therapies
Attains high market share as majority of its products are new delivery
system
High brand concentration (top 10 brands contribute 40% of Indian
sales) in India but there are no differentiated products.
Not having any presence in high end products of Respiratory,
ophthalmic and derma segments
Major contribution from ‘low-value’ anti-malarial products
Current portfolio does not contain any differentiated products
Not having any presence complex therapies
Barring losar and ampoxin, no other big brands in Indian market
Diversified geographical presence
Having own front end presence in emerging and advance markets
Strong presence in developed markets like US, EU and Japan
Promotes its branded products in the US through MRs
Having own front end presence in emerging and advance markets
Own front end in emerging / RoW markets
Presence across 80 countries
No B2B sales
Having front end presence in emerging/RoW markets
Strong foothold in Gx & OTC in the US
Higher B2B sales contribution (APIs contributes 18% of total sales)
Strong presence in developed markets like US and EU
No front end presence in emerging markets
Low geographic diversification- Majority of sales comes from India
Limited presence in advanced markets
No front end presence in the US market; generics also under import
alert
Higher dependence on B2B
Don’t have much presence in emerging markets
Low geographic diversification- Majority of sales comes from India
Robust product basket in the niche therapies like topicals, Opthalmic,
oral contraceptives, nasal and injectables etc
Strong track record of launching differentiated/FTFs products like
gDoxil, gProtonix etc
Presence in US branded business
Presence in complex therapies and niche drugs
Source: Company, Spark Capital Research
Page 22
Business and Financial Analysis
Cash Generation- Sun tops the list while Ipca lags ( Weighted average of FY13-17E)
Source: Company, Spark Capital Research
22%
11%
14%
9% 11%
13%
19%
25%
13%
6%
3% 5%
2% 2% 2%
7%
21%
1%
0%
5%
10%
15%
20%
25%
30%
Ajanta Aurobindo Dr Reddy's Glenmark Indoco Ipca Lupin Sun Unichem
OCF/Sales FCF/Sales
2 7 5 6 8 9 3 1 4
Management expertise
Source: Spark Capital Research
Low
Moderate
High
2nd Generation
Promoter Presence
Ajanta Pharma
Aurobindo Pharma
Dr Reddy's Laboratories
Glenmark Pharma
Indoco Remedies
Ipca Laboratories Lupin
Sun Pharma
Unichem Laboratories
Co
rpo
rate
Go
vern
an
ce
Management Expertise
Bubble size indicates
promoter holding
Page 23
Business and Financial Analysis
Valuation metrics - Unichem tops the list while Ajanta lags (Weighted average of FY13-17E)
Source: Company, Spark Capital Research
Growth & Margins - Ajanta tops the list while Unichem lags (Weighted average of FY13-17E)
Source: Company, Spark Capital Research
36.1
19.0 22.3 23.2
31.3
22.6
28.1 29.8
17.0
22.9
13.1 14.5 14.7 17.2
12.7
17.8 18.3
10.8 12.8
5.8 4.6 5.2 5.3 3.4
7.3 5.7
1.8
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
Ajanta Aurobindo Dr Reddy's Glenmark Indoco Ipca Lupin Sun Unichem
P/E EV/EBITDA P/B
9 2 3 5 8 3 7 6 1
23% 26%
14%
20% 21%
12%
19%
31%
13%
33%
23% 23% 23% 20% 19%
28%
37%
12%
37%
46%
17%
28%
34%
20%
29% 26%
19%
0%
10%
20%
30%
40%
50%
Ajanta Aurobindo Dr Reddy's Glenmark Indoco Ipca Lupin Sun Unichem
Sales Growth EBITDA Margins EPS Growth
1 2 8 6 5 7 4 3 9
Page 24
Business and Financial Analysis
Leverage and WC ratios - Ajanta tops the list while Unichem lags (Weighted average of FY13-17E)
Source: Company, Spark Capital Research
0.1
0.7
0.3
0.7
0.2 0.3
0.1 0.2
0.0 0.2
1.4
1.1
1.8
0.6
1.1
0.1
0.5
0.1
68
158
115
145
113 112
89
110
74
0
20
40
60
80
100
120
140
160
180
0.0x
0.2x
0.4x
0.6x
0.8x
1.0x
1.2x
1.4x
1.6x
1.8x
2.0x
Ajanta Aurobindo Dr Reddy's Glenmark Indoco Ipca Lupin Sun Unichem
Days
Debt/Equity Debt/ EBITDA WC cycle
1 2 8 6 5 7 4 3 9
Performance & Return ratios - Ajanta tops the list while Unichem lags (Weighted average of FY13-17E)
Source: Company, Spark Capital Research
40% 34%
23% 26% 19% 18%
29% 25%
12%
35%
20% 16% 16% 16% 14%
26% 19%
11%
2.7
2.3
1.2
1.8 1.7 1.4
2.4
1.7 1.7
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
0%
10%
20%
30%
40%
Ajanta Aurobindo Dr Reddy's Glenmark Indoco Ipca Lupin Sun Unichem
RoE RoIC Fixed asset turnover
1 2 7 4 6 8 3 5 9
Page 25
Companies
Page 26
Ajanta Pharma (AJP) CMP
Rs.1,456
Target
Rs. 1,363
Rating
REDUCE
Stock performance
1m 3m 12m
AJP 17% 11% 170%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial Summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 12,083 3,688 2,339 26.4 55.1 35.0 47.4% 37.5%
FY15 14,806 5,052 3,183 35.9 40.5 25.3 44.4% 39.1%
FY16E 17,536 5,971 3,842 43.3 33.6 21.3 38.9% 36.1%
FY17E 21,196 7,221 4,834 54.5 26.7 17.3 36.4% 33.9%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg AJP IN
Shares o/s 88mn
Market Cap Rs. 128bn
52-wk High-Low Rs. 1,672-498
3m Avg. Daily Vol Rs. 335mn
Index member BSE200
Latest shareholding (%)
Promoters 73.8
Institutions 9.1
Public 17.0
Initiating Coverage Ajanta Pharma (AJP) focuses on fast growing therapies like CVS, Dermatology, Ophthalmology and Pain management
in Indian market and has a differentiated country specific product basket in emerging markets (EMs). Currently AJP
has a limited presence in the US, but is in the process of scaling up its operations. AJP follows a strategy of launching
differentiated products in each country of its presence. In India, of the 181 products launched so far, 127 (70%)
products were ‘first-to-market’, which gives the company an edge to attain high market share. AJP operates in
emerging markets like Africa, Asia and LatAm through its own front end. It has more than 1400 product registrations
and over 1600 products under development. It also participates in anti-malarial tender business in African market. AJP
registered Revenues / EBITDA / PAT CAGR of 31% / 54% / 58% over FY11-15. We expect growth momentum to continue
driven by incremental product launches across geographies. We expect Revenues / EBITDA / PAT CAGR of 20% / 20%
/ 23% over FY15-17E. However the stock has railed ~67% in the last 6 months leaving no room for upside. We initiate a
REDUCE rating on the stock with a TP of Rs.1363, based on 25x FY17E EPS of Rs 54.5. However, we continue to like
the long term fundamentals of the stock. Risks: Delay in product approvals & addition of new products to price control.
Focus on fast growing therapies: AJP’s strength has been that it has delivered higher than industry growth in the faster
growing segments (CVS, dermatology and ophthalmology). In the last 5 years, AJP has consistently grown (33%) above
industry growth (11%). Deriving ~32% of company sales from India, AJP has displayed remarkable capabilities in launching
‘first-to-market’ drugs in the past. Currently, AJP markets 181 brands out of which 127 brands (70%) are first-to-market in
India. We believe AJP can launch 15-20 products annually over next three years and expect these product launches coupled
with increase in market share of existing products to drive India sales growth at a CAGR of 22% over FY15-17E.
Follows selective product approach for EMs: AJP currently gets entire export revenues (68% of total sales) from emerging
markets like Africa (19 countries), Asia (12 countries) and LatAm (4 countries). It follows a strategy of country specific product
portfolio in these geographies. The company operates though their own front end in these geographies as these markets are
similar to Indian market (branded generics). So far, the company has registered 1445 brands, and over 1600 brands are
under registration. Besides branded generics, AJP also participates in anti-malarial tenders in Africa. Exports sales have
grown at a CAGR of 32% over FY11-15 primarily driven by tender business (43%). However, we expect growth acceleration
to slow down to 18% CAGR in FY15-17E as growth in tender business is expected to be muted.
US sales to pick from FY17: AJP is relatively a late entrant to the US market. Despite that, it has set up its own front end
team by hiring two senior employees of Dr. Reddy’s. So far, it has filed 25 ANDAs with USFDA, received approval for 2
products and launched one product Risperidone (6% market share). It is planning to file and launch 5-6 products every year.
We expect meaningful revenue contribution from US to start only from FY17E.
Differentiated play leading to supernormal growth; Priced ahead of time
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 27
Ajanta Pharma (AJP) CMP
Rs.1,456
Target
Rs. 1,363
Rating
REDUCE Business Overview
Super-normal growth in recent past
Source: Company, Spark Capital Research
Sales break up (FY15)
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E CAGR
Domestic 1,749 2,270 2,920 3,850 4,780 5,807 7,117 22%
Branded 1,346 1,724 2,380 3,190 4,170 5,197 6,507 25%
Ophthalmology 378 459 640 850 1,140 1,482 1,927
Dermatology 480 607 790 1,000 1,180 1,310 1,454
Cardiac 365 539 720 1,040 1,450 1,885 2,451
Others 123 119 230 300 400 520 676
Institutional 403 546 540 660 610 610 610 0%
Exports 2,862 3,717 5,370 6950 8,499 9,935 11,915 18%
Asia 1,043 1,054 2,390 3,110 3,815 4,364 4,931 14%
Africa 1,747 2,563 2,720 3,680 4,508 5,315 5,921 15%
Latin America 72 100 260 160 130 132 132
US 0 0 0 0 46 124 930
Subsidiary sales 417 731 911 983 1,244 1,542 1,912 24%
Domestic-Branded
29%
Domestic-institutional
4% Africa -
Branded 17%
Africa - institutional
19%
Asia 30%
Latam 1%
USA 0%
4,9
88
6,7
74 9,3
08
12,0
83
14,8
06
18% 19%
24%
31%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY11 FY12 FY13 FY14 FY15
Rs. M
n
Revenues EBITDA margin (%)
Page 28
Ajanta Pharma (AJP) CMP
Rs.1,456
Target
Rs. 1,363
Rating
REDUCE Strong foothold in Ophthalmology, Dermatology and Cardiology
Leading through innovation
Source: Company, Spark Capital Research; Total Launches at end of FY15
Generating strong & sustainable growth
Source: Company, Spark Capital Research
Plugging gaps within the India Pharma market (IPM ) – Table
Source: Company, Spark Capital Research
In the right segments with superior growth
Source: Company, Spark Capital Research
Growth CAGR (%)
Ranking
1YR 5YR
Industry Ajanta Industry Ajanta Mar-05 Mar-12 Mar-15
Ophthalmology 19% 31% 17% 25% 28 6 5
Cardiology 10% 37% 15% 34% 38 29 22
Dermatology 18% 11% 13% 29% 98 14 13
Overall 12% 26% 9% 28% 88 45 36
Drug Rank FY08 FY09 FY10 FY11 FY12 FY13
Pimecrolimus 1 0% 94% 44% 47% 40% 56%
Rosuvastatin + Clopidogrel 1 0% 0% 0% 0% 100% 100%
Difluoro Prednisolone Acetate 1 0% 0% 0% 79% 58% 53%
Amitriptyline + Ketamine 1 0% 0% 0% 100% 100% 100%
Hydroquinone + Tretinoin + Fluticasone 1 0% 0% 0% 0% 100% 100%
Besifloxacin 1 0% 0% 0% 0% 100% 100%
Kojic Acid + Vitamin C + Arbutin + Lactic Acid 1 94% 94% 100% 100% 100% 100%
Moxifloxacin + Prednisolone 1 0% 70% 38% 44% 61% 64%
61
32
58
30
51
11
40
25
Ophthalmology Cardiology Dermatology Others
Total launches First in market
2,920
3,850
4,780
5,807
7,117
8,793
0
2,000
4,000
6,000
8,000
10,000
FY13 FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Domestic
Page 29
Ajanta Pharma (AJP) CMP
Rs.1,456
Target
Rs. 1,363
Rating
REDUCE Emerging markets – a growth driver
Select markets; selective products
Presence in 25+ emerging markets with own front end
Exports contributed ~63% to total revenues in FY15
Grown at a CAGR of 31% in FY11-15
Launched 48 products in FY15
Field force strength increased to 572 at end of FY15 from 450 in FY14
Country specific brand portfolio enabling growth
Brands gaining further ground in many markets
Ranked among Top 5 companies in Franco Africa
Amongst fastest growing companies in Philippines
Got anti-malaria WHO pre-qualification even before leader Ipca
Source: WHO , Spark Capital Research
Strong existing portfolio with healthy launches going ahead
Source: Company, Spark Capital Research
Artemether + Lumefantrine tablets
Company Date of Approval
Novartis Pharma 26-Apr-04
Ajanta Pharma 16-Dec-08
Cipla 22-May-09
Ipca Laboratories 15-Dec-09
Strides Arcolab 24-Jun-13
Macleods Pharma 21-Oct-13
Artemether + Lumefantrine Dispersible tablets
Company Date of Approval
Novartis Pharma 27-Feb-09
Ajanta Pharma 12-Dec-12
Strong growth expected
Source: Company, Spark Capital Research
30 23
14 13
23
35
22 18
11 17
-38
-19
2 0 0
-50
-40
-30
-20
-10
0
10
20
30
40
FY14 FY15 FY16E FY17E FY18E (%)
Asia Africa Latin America
Region Brands
Registered
Under
registration
MR
strength Major therapies
Africa 1,118 1,106 257 Anti-biotic, Anti-Malaria, Ortho
Asia 294 360 315 Anti-biotic, Derma, Ortho,
OTC, Ophthalmic, Cardio, GI
Lat-Am 33 143 0 Ophthalmic, Med, GI
Total 1,445 1,609 572
Page 30
Ajanta Pharma (AJP) CMP
Rs.1,456
Target
Rs. 1,363
Rating
REDUCE USA entry – Set for the next leap
ANDA filings in place
Source: Company, Spark Capital Research
Stage set for US expansion
Front-end team in the US already set - Two senior employees from Dr
Reddy’s:- John Adams (ex-Vice President Sales & Marketing) and Jeff
Burd,(ex- head of Rx sales) brought on-board
Filed 25 ANDAs, mix of Para II, Para III & Para IV; estimated generic market
size of ANDAs filed ~$1.5 bn
Received approvals for 2 products
Re-launched Risperidone with own front end team – already gaining ground
Levetiracetam (already approved) launch plan in place
Filing target every year > 6 products
Setting up USFDA compliant formulation facility at Dahej SEZ - Expected to be
commissioned end of FY16 / early FY17
Driven by R&D cost
Source: Company, Spark Capital Research
Product launches to pick up from FY16 onwards
Source: Company, Spark Capital Research
2
0
7
5
9
2
0
2
4
6
8
10
FY10 FY11 FY12 FY13 FY14 FY15
Nu
mb
er
of
fili
ng
s
ANDA filings
0 46 124
930
1,612
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY14 FY15 FY16E FY17E FY18E
Rs.M
n
US Sales
200 250
370 373
499
700
4.9% 5.0% 5.5%
4.1% 4.2%
5.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0
100
200
300
400
500
600
700
800
FY10 FY11 FY12 FY13 FY14 FY15
Rs. M
n
R & D cost R & D cost (% of sales)
Page 31
Ajanta Pharma (AJP) CMP
Rs.1,456
Target
Rs. 1,363
Rating
REDUCE Financials
Best in class return ratios…
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 20% in FY15-17E
Source: Company, Spark Capital Research
EBITDA to grow at a CAGR of 20% in FY15-17E
Source: Company, Spark Capital Research
12,083
14,806
17,536
21,196
26,162 30%
23%
18% 21%
23%
0%
5%
10%
15%
20%
25%
30%
35%
0
5,000
10,000
15,000
20,000
25,000
30,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
47.4%
44.4%
38.9% 36.4%
34.9%
37.5% 39.1%
36.1% 33.9%
32.5%
20%
25%
30%
35%
40%
45%
50%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
…Highest among peers
Source: Company, Spark Capital Research; * RoNW is
average of last 3 years
1 Yr PE/graph
Source: Bloomberg, Spark Capital Research
3,688
5,052
5,971
7,221
8,998
31%
34% 34% 34%
34%
28%
29%
30%
31%
32%
33%
34%
35%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margin (%)
20%
34%
43%
12%
31%
28%
20%
28%
28%
15%
23%
26%
0%
10%
20%
30%
40%
50%
FY15-17E Revenue CAGR
(%)
FY15 Margins RoNW*
Ajanta Pharma Sun Pharma Lupin Dr Reddy's
0
500
1,000
1,500
2,000
2,500
Nov-1
0
Mar-
11
Jul-11
Nov-1
1
Mar-
12
Jul-12
Nov-1
2
Mar-
13
Jul-13
Nov-1
3
Mar-
14
Jul-14
Nov-1
4
Mar-
15
12M fwd P/E
CM
P (
Rs.)
40x
10x
16x
22x
28x
34x
Page 32
Ajanta Pharma (AJP) CMP
Rs.1,456
Target
Rs. 1,363
Rating
REDUCE Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 12,083 14,806 17,536 21,196 Revenue 29.8% 22.5% 18.4% 20.9%
EBITDA 3,688 5,052 5,971 7,221 EBITDA 66.4% 37.0% 18.2% 20.9%
Depreciation 439 516 601 862 Adjusted PAT 82.9% 36.1% 20.7% 25.8%
EBIT 3,249 4,536 5,369 6,358 Margin ratios
Other Income 137 168 126 126 EBITDA 30.5% 34.1% 34.0% 34.1%
Interest expense 87 59 69 81 Adjusted PAT 19.4% 21.5% 21.9% 22.8%
Exceptional items / Forex gain / (loss) 0 85 0 0 Performance ratios
PBT 3,299 4,645 5,426 6,403 RoE 47.4% 44.4% 38.9% 36.4%
PAT (after minority interest) 2,339 3,099 3,842 4,834 RoIC 37.5% 39.1% 36.1% 33.9%
Adjusted PAT (after MI) 2,339 3,183 3,842 4,834 Core RoIC 39.8% 44.5% 44.0% 20.4%
Balance Sheet Fixed asset turnover (x) 2.7 2.9 2.8 2.6
Net Worth 5,934 8,411 11,365 15,162 Total asset turnover (x) 1.4 1.4 1.3 1.2
Total debt 1,129 512 834 1,078 Financial stability ratios
Other liabilities and provisions 283 224 206 266 Net Debt to Equity (x) (0.0) (0.1) (0.2) (0.3)
Current liabilities & provisions 2,149 2,317 3,175 3,837 Current ratio (x) 2.6 2.8 2.9 3.3
Total Networth and liabilities 9,494 11,464 15,579 20,343 Inventory and debtor days 108 103 108 108
Gross Fixed assets 4,903 5,273 7,273 9,273 Working capital days 69 63 68 68
Net fixed assets 3,729 4,583 4,046 5,184 Interest cover (x) 0.0 0.0 0.0 0.0
Investments 85 401 401 401 Valuation metrics
Cash and bank balances 1,154 1,562 2,707 4,989 Fully Diluted Shares (mn) 88.6
Other Long term assets 88 53 1,988 1,988 Market cap (Rs.mn) 1,29,065
Current assets 4,438 4,865 6,438 7,782 Adjusted EPS (Rs.) 26.4 35.9 43.3 54.5
Total assets 9,494 11,464 15,579 20,343 P/E (x) 55.2 40.5 33.6 26.7
Cash Flows EV (Rs.mn) 1,29,039 1,28,014 1,27,192 1,25,153
Cash flows from Operations 2,124 3,356 3,728 5,015 EV/ EBITDA (x) 35.0 25.3 21.3 17.3
Cash flows from Investing -1,878 -1,651 -2,000 -2,000 BV/ share (Rs.) 66.9 94.9 128.2 171.0
Cash flows from Financing -201 -1,297 -584 -733 Price to BV (x) 21.8 15.3 11.4 8.5
Page 33
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY
Stock performance
1m 3m 12m
ARPB -3% 11% 82%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 80,998 21,320 13,751 47.1 27.1 19.1 43.3% 21.3%
FY15 1,21,205 25,636 16,194 55.5 23.0 15.9 36.4% 19.9%
FY16E 1,39,930 32,880 20,765 71.1 18.0 12.3 34.0% 21.0%
FY17E 1,60,520 39,719 25,365 86.9 14.7 9.9 30.8% 21.3%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg ARBP IN
Shares o/s 292mn
Market Cap Rs. 373bn
52-wk High-Low Rs. 1,432-644
3m Avg. Daily Vol Rs. 2,069mn
Index member BSETHC
Latest shareholding (%)
Promoters 54.0
Institutions 35.8
Public 10.2
Initiating Coverage Aurobindo Pharma (APL) has seen a sharp change in its business mix over the past 3 years. The company has
increased its presence in US, Europe and other formulation businesses and sharply reduced contribution from its API
business (44% of sales in FY12 to 22% in FY15). Once a relatively insignificant Indian player in the US market (FY12,
<$250mn sales), APL is now comparable to Lupin (4Q15 sales: Lupin $211mn versus Auro $215mn). Over the past 3
years, not only has the business mix changed, but it has also helped improve key metrics for the company. Over FY12
to FY15 formulations contribution (56% to 78%), EBITDA margin (13.2% to 21.2%), Net debt to EBITDA (4.1x to 1.3x),
Return on Equity (17.6% to 36.4%) have all seen a sharp improvement. Despite 3 years of robust performance, we
believe the story has just begun for APL and the best is yet to come in terms of financial delivery. The company has in
the recent past also displayed best USFDA compliance track record when compared to larger peers (recent inspections
all through without any major observations). We are building in Sales / EBITDA / PAT CAGR of 15% / 24% / 25% over
FY15-17E. We also believe that there is further scope for re-rating of the PE multiple of the stock with reducing
leverage, improving cash flow and improving quality of niche products in the US market. We initiate coverage on
Aurobindo with a BUY rating and a TP of Rs. 1737 (20x FY17E EPS of Rs. 86.9). Key risks to our call remain slower
approvals, adverse regulatory action and adverse currency fluctuations.
US business mix changing for the better: APL’s US business is going through a transformation stage. There has been a
ramp up of injectable and controlled substance products for APL in the US over the past 3 years. We believe going ahead the
pick up in injectables should be extremely sharp ($68mn in FY15 to $166mn in FY17E). The company has 43 injectables
pending for approval with ~100 more to be filed over the next 3 years. We also believe complexity of product portfolio and
profitability from each product should increase going ahead as the company is preparing on Peptides, Penems, Oncology and
Hormonal product filings. We are building in a sales CAGR of 23% in the US business over FY15-FY17E.
EU turnaround so far so good: APL acquired West European commercial operations of Actavis (~$410mn sales) for just
$45mn (practically free). At the time of acquisition the operations were loss making at EBITDA level but by the end of FY15
the same is now at break-even. We believe APL can derive significant benefits on manufacturing costs over the next 18-24
months as it implements site transfers for more than 200 products. Management has guided for a PAT breakeven by FY16E.
We are building in a conservative 2% EBITDA margin for these operations by FY17E.
EBITDA margin improvement and ROE stability in sight: We believe APL’s improving business mix and healthy sales
growth should help expand the bottom line even more than the top line. We are building in EBITDA margin expansion of
~360bps over FY15-17E. We believe ROEs should remain in the healthy range of 30-35%. We are building in an EPS CAGR
of 25% over FY15-17E and believe there is upside risks to the same on improving product approval timelines by the USFDA.
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Once a ‘Dark Horse’ now the ‘Torch Bearer’
Page 34
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY
Sharp increase in Gross Margins from increasing formulation contribution
Source: Company, Spark Capital Research
Sales break up - FY15
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
Business Overview
Rs. Mn FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E CAGR
Formulations 24,231 26,074 33,872 53,784 95,586 115,533 13,6270 19%
USA 11,897 11,836 17,526 34,028 48,317 61,149 74,540 24%
Europe 3,359 3,815 4,679 6,721 31,947 35,604 39,194 11%
RoW 2,039 2,556 4,164 4,634 5,683 6,924 8,309 21%
ARVs 6,936 7,867 7,503 8,402 9,639 11,856 14,227 21%
APIs 18,021 20,620 25,362 28,642 27,062 27,842 28,223 2%
SSPs 5,647 6,289 7,652 9,778 8,640 8,778 8,778 1%
Cephs 8,473 7,461 9,373 8,755 9,300 9,621 9,814 3%
Non-Betalactam 3,901 6,870 8,337 10,109 9,122 9,442 9,631 3%
Dossier 2,556 5,99 760 165 104 140 140 16%
54 46 43 44 43
35 22
46 54 57 56 57
65 78
47%
52% 50%
46%
49%
56%
55%
30%
35%
40%
45%
50%
55%
60%
0
20
40
60
80
100
FY09 FY10 FY11 FY12 FY13 FY14 FY15
APIs Formulations Gross Profit Margins (%)
USA, 39%
EU, 26%
RoW, 5%
ARVs, 8%
APIs, 22%
Dossiers, 0%
Page 35
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY
Adding few more niche therapies to pipeline
Source: Company, Spark Capital Research
Robust pipeline of ANDAs pending approval
Source: Company, Spark Capital Research
Highest among peer group
Source: Company, Spark Capital Research
Oral Gx, 69% SSP Injectables
, 3%
Control Substance , 4%
Oral contraceptive ,
4%
Ophthalmic, 3%
Respiratory , 1%
Penems, 1%
Oral Gx FTFs, 2%
General Liquid parenteral ,
13%
Current pipeline therapy
wise Future basket includes
Oncolytics
Peptides
Steroids
Branded Gx
Dry powder Inhaler
Becoming a stronger player each passing day in the US market
Near term launches
Source: Company, Spark Capital Research; *Brand value in
US$ Mn
API Product Expected Brand
Value*
Known
players
Esomeprazole Nexium 2QFY16 6,000 8
Memantine Namenda 2QFY16 2,000 <10
Aripiprazole Abilify Q3FY16 7,800 8
Efavirenz Sustiva Q3FY16 1,500 9
Emtricitabine Emtriva Q4FY16 25 5
Abacavir
sulfate/Lamivudine Epzicom Q4FY16 500 5
Palonosetron HCL Aloxi FY16 420 4
Rosuvastatin Crestor Q1FY17 3,100 10
Paricalcitol Zemplar Q3FY17 300 6
Lopinavir/Ritonavir Kaletra Q3FY17 256 5
Ritonavir Norvir Q3FY17 500 3
Atomoxetine Strattera FY17 384 6
Tenofovir Disporoxil Viread 2QFY18 550 6
Emtricitabine +
tenofovir Truvada 3QFY18 2,000 6
Atazanavir Reyataz FY18 770 5
Tigecycline Tygacil FY18 120 3
Bivalirudin Angiomax Q4FY20 450 4
Ibandronate sodium Boniva FY20 450 6
Lacosamide Vimpat FY22 353 8
84 102 119 155 165 166
29 32
28 26 26 27
59 75
92 88
145 183
0
50
100
150
200
250
300
350
400
FY10 FY11 FY12 FY13 FY14 FY15
AN
DA
fil
ing
s
Final approval Tentative approval Waiting for approval
68 70
99
159 161
183
0
40
80
120
160
200
DR
L
Gle
nm
ark
Lupin
Sun
Cadila
Auro
bin
do
AN
DA
fil
ing
s
Page 36
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY Injectable pipeline – A booster dose
Already built a diversified Injectable basket ….
Source: Company, Spark Capital Research
…. And still improvising on product complexity
Source: Company, Spark Capital Research
Injectable sales – ~3x every 2 years!
Source: Company, Spark Capital Research
Oral pipeline also equally strong
Source: Company, Spark Capital Research
Strengthening of OTC business with Natrol acquisition
Source: Company, Spark Capital Research; Natrol consolidation towards 3Q15 end, effectively ~100 days sales in FY15
Enhanced OTC presence with Natrol acquisition
for US$ 132.5mn
Natrol is amongst top 20 nutraceuticals cos in US
It sells nutraceutical brands like Natrol, MRI,
Prolab, Laci Le Beau
Annual sales ~US$ 100mn with margins ~13-14%
APL is also developing 35 OTC products
Relationship with distributor and retailer to drive
own label products
7
2 2
17
6 6
36
0
5
10
15
20
25
30
35
40
Ophth
al
Resp.
Penem
Oncolo
gy
Ste
roid
s
Peptid
e
Genera
l
No
. o
f P
rod
uc
ts
53 51
27 18 17
39
10
84
0
30
60
90
CN
S
CV
S
AR
V
GI
CS
Anti-in
fec.
Dia
betics
Oth
ers
No
. o
f p
rod
uc
ts
ANDA filed (LHS)
Total addressable market size US$
85 Bn
30
116 128
140
0
20
40
60
80
100
120
140
160
FY15 FY16E FY17E FY18E
US
$ M
n
Natrol
37
67
98
166
246
0
50
100
150
200
250
300
FY14 FY15 FY16E FY17E FY18E
US
$ M
n
10 8 10 5 2
43
0
10
20
30
40
50
60
SSP Ophthal Resp. Penem General
No
of
Pro
du
cts
Approved Under approval
$0.6
Bn
$3.8
Bn
$8.4
Bn
$0.6
Bn
$4.1Bn
Page 37
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY Acquisition of Actavis’ Europe operations enables strong front end business
High chronic portfolio presence
Source: Company, Spark Capital Research
Geographical contribution of acquired Actavis business
Source: Company, Spark Capital Research
Margins to improve consistently in Actavis acquired business
Source: Company, Spark Capital Research
Strategy in place to turnaround the business
Gross profit margin should be improved by sourcing low cost APIs /
manufacture those internally
Site transfer for majority of products or replace the products with its own
products
Increase own labelled product launches through the front end
infrastructure
To supply high margin oncology & hormonal injectables to the
established hospital infrastructure in key geographies
Source: Company, Spark Capital Research
FY15-17E CAGR 8%
25,013 27,158
29,060 31,966
-545
8 436 1,439
-2%
0%
2%
5%
-4%
-2%
0%
2%
4%
6%
8%
10%
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY15P FY16E FY17E FY18E
US
$ M
n
Sales EBITDA Margins (%)
France, 34%
Germany, 24%
Netherlands, 14%
Spain, 10%
Portugal, 5%
UK, 7%
Italy, 6%
CVS & Respiratory,
28%
CNS, 21%
Anti-infectives, 15% Digestive, 13%
Anti-neoplastic, 9%
Dermatological, 5%
Other, 9%
Page 38
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY
Steady growth in the ROW markets
Source: Company, Spark Capital Research
4,634 5,683
6,924
8,309
9,971
0
2,000
4,000
6,000
8,000
10,000
12,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
RoW
ARV business lumpy in nature – focus now on only profitable tenders
Source: Company, Spark Capital Research
8,402 9,639
11,856
14,227
17,073
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
ARVs
RoW & ARVs also growing
Largely focused on select geographies
Source: Company, Spark Capital Research
Strong improvement in Net debt to equity
Source: Company, Spark Capital Research
Focus
markets Filed Approved Industry dynamics
Brazil 89 35
6th largest Pharma market globally
Largely branded Gx in nature; Gx subs increasing
Govt’s supporting Gx penetration
APL is building strong product pipeline
South
Africa 336 144
World’s largest HIV population
New Pricing system for innovators and
benchmarking for Gx players being introduced
APL is enhancing presence on private oral &
Injectable
Canada 80 60 Healthcare system is govt funded; looking to
consolidate its presence
34,553 33,748
32,254
20,837
5,720
0.9
0.7
0.5
0.2
0.0 0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
FY14 FY15 FY16E FY17E FY18E
(X)
Rs. M
n
Net Debt Net debt to equity
Page 39
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY Comparison with Large Cap peers: Scale and ratios comparable, Valuations not
FY15 Return on Equity better than Sun, Lupin and DRL
Source: Company, Spark Capital Research
Net debt/EBITDA comfortably below 1x; In line with peers
Source: Company, Spark Capital Research
Strongest growth outlook
Source: Company, Spark Capital Research; * Sun numbers includes acquired Ranbaxy
RoICs in line with peers
Source: Company, Spark Capital Research
Net debt/EBITDA <1
Company
Revenues EBITDA EPS
FY12-
FY15
FY15-
FY17E
FY12-
FY15
FY15-
FY17E
FY12-
FY15
FY15-
FY17E
Aurobindo 37% 15% 61% 24% 56% 25%
Sun Pharma* 50% 19% 39% 33% 26% 37%
Lupin 21% 20% 35% 23% 40% 24%
Dr Reddy's 15% 15% 11% 17% 15% 18%
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
FY12 FY13 FY14 FY15 FY16E FY17E
(X)
Aurobindo Sun Pharma Lupin Dr Reddy's
15%
20%
25%
30%
35%
40%
45%
FY12 FY13 FY14 FY15 FY16E FY17E
Aurobindo Sun Pharma Lupin Dr Reddy's
0%
5%
10%
15%
20%
25%
30%
FY12 FY13 FY14 FY15 FY16E FY17E
Aurobindo Sun Pharma Lupin Dr Reddy's
Page 40
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY Heading towards front line players
Focusing on complex products like Sun, Lupin and DRL
Source: Company, Spark Capital Research
Lupin, DRL and APL US sales comparable
Source: Company, Spark Capital Research
Regulatory risk low – Best compliance recently
Source: Company, Spark Capital Research
Aurobindo Sun Pharma Lupin Dr Reddy's
Ophthalmic Topical Oral Contraceptive Biosimilars
Control Substance Control Substance Ophthalmic Long acting
Injectables
Inhalers Long acting
Injectables
Long acting
Injectables Transdermals
Oncology Ophthalmic Nasal & Inhalers Topicals
Penems Nasal & Inhalers Long acting
Injectables Peptides
Peptides Peptides Topicals
Inorganic growth capability in place like others
*Assuming 10% equity dilution for APL, Lupin & Sun, i) Debt
to EBITDA assumed 2.5x ii) Acquired business EBITDA
assumed 20% of acquirer’s EBITDA
Multiples at sharp discount to larger peers
Source: Bloomberg, Spark Capital Research
Sun Pharma ( Halol )
Lupin (Indore)
Dr Reddy's (Srikakulam)
Aurobindo Pharma (Unit IV)
Company Recent
acquisitions
Acquisition
Capability
Aurobindo
Actavis Western
Europe operations &
Natrol
US$ 1.6 Bn
Sun Pharma
Ranbaxy, URL
generic portfolio &
Dusa
US$ 8.6 Bn
Lupin
Medquimica,
Laboratorios Grin,
Nanomi
US$ 3.8 Bn
Dr Reddy's OctoPlus US$ 2.1 Bn
0
500
1,000
1,500
2,000
2,500
3,000
3,500
FY11 FY12 FY13 FY14 FY15 FY16E FY17E
US
$ M
n
Aurobindo Sun Pharma Lupin Dr Reddy's
18
26 27
21
0
5
10
15
20
25
30
35
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
(x)
APL Sun Lupin DRL
Page 41
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY Financial summary
EBITDA margins to expand going ahead
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 15% over FY15-17E
Source: Company, Spark Capital Research
1yr-forward PE graph
Source: Bloomberg, Spark Capital Research
Return rations remains strong
Source: Company, Spark Capital Research
80,998
121,205
139,930
160,520
185,351
38%
50%
15% 15% 15%
0%
10%
20%
30%
40%
50%
60%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
21,320
25,636
32,880
39,719
47,484 26%
21% 23%
25%
26%
0%
5%
10%
15%
20%
25%
30%
0
10,000
20,000
30,000
40,000
50,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA Margins (%)
43%
36% 34%
31% 28%
21% 20% 21% 21% 21%
0%
10%
20%
30%
40%
50%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan
-09
Apr-
09
Jul-09
Oct-
09
Jan
-10
Apr-
10
Jul-10
Oct-
10
Jan
-11
Apr-
11
Jul-11
Oct-
11
Jan
-12
Apr-
12
Jul-12
Oct-
12
Jan
-13
Apr-
13
Jul-13
Oct-
13
Jan
-14
Apr-
14
Jul-14
Oct-
14
Jan
-15
Apr-
15
12M fwd P/E
CM
P (
Rs.)
25x
5x
9x
13x
17x
21x
Page 42
Aurobindo Pharma (APL) CMP
Rs. 1,278
Target
Rs. 1,737
Rating
BUY Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 80,998 1,21,205 1,39,930 1,60,520 Revenue 38.3% 49.6% 15.4% 14.7%
EBITDA 21,320 25,636 32,880 39,719 EBITDA 139.8% 20.2% 28.3% 20.8%
Depreciation 3,125 3,326 4,845 5,482 Adjusted PAT 200.7% 17.8% 28.2% 22.2%
EBIT 18,195 22,310 28,036 34,237 Margin ratios
Other Income 232 808 818 806 EBITDA 26.3% 21.2% 23.5% 24.7%
Interest expense 1,079 843 793 766 Adjusted PAT 17.0% 13.4% 14.8% 15.8%
Exceptional items / Forex gain / (loss) 2,022 436 0 0 Performance ratios
PBT 17,348 22,275 28,061 34,277 RoE 43.3% 36.4% 34.0% 30.8%
PAT (after minority interest) 11,729 15,758 20,765 25,365 RoIC 21.3% 19.9% 21.0% 21.3%
Adjusted PAT (after MI) 13,751 16,194 20,765 25,365 Core RoIC 21.2% 19.4% 21.0% 20.8%
Balance Sheet Fixed asset turnover (x) 2.0 2.5 2.3 2.3
Net Worth 37,501 51,559 70,699 94,185 Total asset turnover (x) 1.0 1.1 1.0 1.0
Total debt 36,339 38,636 39,632 38,300 Financial stability ratios
Other liabilities and provisions 2,146 2,349 0 0 Net Debt to Equity (x) 0.9 0.7 0.5 0.2
Current liabilities & provisions 18,655 36,343 36,903 41,676 Current ratio (x) 3.4 2.4 2.8 3.0
Total Networth and liabilities 94,898 1,29,145 1,47,493 1,74,419 Inventory and debtor days 225 215 210 210
Gross Fixed assets 41,830 56,095 64,595 73,095 Working capital days 197 139 151 152
Net fixed assets 30,314 41,253 44,908 47,926 Interest cover (x) 0.1 0.0 0.0 0.0
Investments 198 1 1 1 Valuation metrics
Cash and bank balances 1,786 4,888 7,378 17,463 Fully Diluted Shares (mn) 292.0
Other long term assets 185 350 350 350 Market cap (Rs.mn) 3,73,178
Current assets 62,416 82,653 94,855 1,08,679 Adjusted EPS (Rs.) 47.1 55.5 71.1 86.9
Total assets 94,898 1,29,145 1,47,493 1,74,419 P/E (x) 27.1 23.0 18.0 14.7
Cash Flows EV (Rs.mn) 4,07,731 4,06,926 4,05,432 3,94,015
Cash flows from Operations 2,791 16,926 13,967 21,796 EV/ EBITDA (x) 19.1 15.9 12.3 9.9
Cash flows from Investing -4,838 -14,234 -8,500 -8,500 BV/ share (Rs.) 128.4 176.6 242.1 322.6
Cash flows from Financing 1,749 410 -2,977 -3,211 Price to BV (x) 10.0 7.2 5.3 4.0
Page 43
Divi’s Laboratories (DIVI) CMP
Rs.1,764
Target
Rs. 2,186
Rating
BUY
Stock performance
1m 3m 12m
Divi 1% -2% 32%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 25,321 10,145 7,733 58.3 30.3 22.6 28.3% 27.1%
FY15 31,149 11,653 8,515 64.2 27.5 19.4 26.4% 25.3%
FY16E 35,700 13,729 10,216 77.0 22.9 16.4 26.6% 25.4%
FY17E 43,170 16,792 12,616 95.0 18.6 13.2 27.3% 25.8%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg DIVI IN
Shares o/s 133mn
Market Cap Rs. 234bn
52-wk High-Low Rs. 1,969-1,311
3m Avg. Daily Vol Rs. 322mn
Index member BSE100
Latest shareholding (%)
Promoters 52.2
Institutions 27.2
Public 20.6
Initiating Coverage Divi’s Laboratories (DIVI) is a leading player in CRAMS space with strong R&D capabilities, successful track record of
project execution, India centric manufacturing base and IPR compliance. These factors have differentiated Divis from
other CRAMS players. It follows a selective approach in developing generic APIs. It scales up only those products
where it can reduce costs significantly lower than peers. Divis has the highest profit margins and the best return ratios
amongst CRAMS players. We believe the existing mature product pipeline should drive growth in API segment while
increase in outsourcing from MNCs should boost Custom Synthesis (CS) business sales. We expect Divis to post
revenues, EBITDA and net profit CAGR of 18%, 20%, and 22% respectively over FY15-17E. We initiate coverage with a
BUY rating and a TP of Rs 2186, based on 23x FY17E EPS of Rs 95.
Follows a selective approach in API business: Divis follows a selective approach in identifying and developing APIs. Thus,
it has filed only 38 DMFs with USFDA, 214 EDMFs and 18 CoS with EU authorities despite a long ~20 years of existence. It
identifies molecules with complex chemistries and focuses on cost optimisation by improving both process & production
efficiencies. This has made them attain global leadership in APIs like Naproxen, Dextromethorphan and Diltiazem. We believe
the existing matured product pipeline and the products under development should drive growth in API business. We expect
revenues from generic API segment to grow at a CAGR of 14% in FY15-17E.
Custom synthesis (CS); A key margin driver: Divis is the preferred go-to partner for CRAMS business to most MNC
players due to its key strengths like strong R&D capabilities, successful track record of project execution, India centric
manufacturing base and IPR compliance. CS business contributes nearly 50% of total top line and its profitability is superior to
generics & API segment. We believe declining profitability, increase in R&D costs and poor R&D output should continue to
force innovator companies to outsource manufacturing of intermediates / APIs and early stage discovery molecules and Divis
should continue to be a key beneficiary of this trend. We expect CS business to grow at a CAGR of 19% over FY15-17E.
Market share improvement a top priority in Nutraceuticals: The sales from Nutraceuticals / Carotenoids segment has
started picking up from FY14 (CAGR growth of 35% in FY13-15) onwards as nutraceutical plant at Vizag received FSSC
22000 certification. The accreditation has enabled nutraceuticals supplies for pharmaceutical use. Currently, this segment
contributes ~5% of sales. The global market size of carotenoids is ~US$ 1.2 bn in FY14 and is expected to reach US$ 1.4 bn
by FY19. We expect improvement in market share of existing products and new product launches to drive Carotenoids sales
in FY15-17E by 48% (CAGR).
New facility to drive next leg of growth: Divis is setting up its 5th manufacturing facility for APIs / intermediates at Kakinada
with an investment of Rs 5 bn. Historically, Divis has followed a measured approach, adding capacity only when it has clear
visibility on utilisation and therefore new capacity is a good indicator of mid-term growth, in our view.
‘Right Chemistry’
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 44
Divi’s Laboratories (DIVI) CMP
Rs.1,764
Target
Rs. 2,186
Rating
BUY
Manufacturing facilities
Source: Company, Spark Capital Research
Geography wise sales break up (FY14)
Source: Company, Spark Capital Research
Segmental sales break up (FY15)
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
Business overview
Custom synthesis
47% Generics
48%
Neutraceuticals
5% Asia 7%
Europe 36%
America 44%
RoW 4%
India 9%
Unit
Name Place
Production
blocks Reactors
Capacity
m3
Unit 1 Hyderabad 13 356 1,697
EOU Visakhapatanam 8 186 1,359
SEZ
Unit Visakhapatanam 9 324 2,567
DSM
SEZ
Unit
Visakhapatnam 5 234 2,245
(Rs. Mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E
CAGR
Custom synthesis 6,067 8,953 10,220 11,994 14,298 16,725 20,236 19%
Generics 6,308 8,685 10,152 12,306 14,601 16,420 19,100 14%
Neutraceuticals 634 815 920 1,280 1,690 2,440 3,720 48%
Page 45
Divi’s Laboratories (DIVI) CMP
Rs.1,764
Target
Rs. 2,186
Rating
BUY Preferred custom synthesis partner for MNCs
Gained largest market share despite being a late entrant
Source: USFDA, Spark Capital Research
Shasun’s Gabapentin sales witness sharp decline post Divi’s launch
Source: Company, Spark Capital Research
Steadily adding new products to custom synthesis pipeline
Source: Company, Spark Capital Research
New products introduction to boosts API and CS segments
Best patent compliant track record, no conflict of interest with customers
Follows selective approach in identifying and developing active ingredients
(APIs) & intermediates.
Filed only 38 DMFs with USFDA, 214 EDMFs and 18 CoS with various EU
authorities despite ~ 20 years of operations.
Maximum focus on cost optimization by improving both the process and
production.
Attained global leadership in some of the APIs like Naproxen, Dextromethorphan
and Diltiazem.
Preferred custom synthesis (CS) partner for most MNC players due to strong
R&D capabilities, successful track record of project executions and IPR
compliance.
Enjoys higher margins for the segment compared to generics.
Naturally growing business with successful execution of projects in the segment.
Source: Company , Spark Capital Research
11
5 5 5
13
5 6
5
0
2
4
6
8
10
12
14
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
No
. o
f p
rod
uc
ts
1,137 1,287
1,931
1,056
847
0
500
1,000
1,500
2,000
2,500
FY10 FY11 FY12 FY13 FY14
Rs. M
n
API Therapy Nth Player
to file DMF
Total DMF
filers
Naproxen Anti-Inflammatory 19 24
Dextromethophan Hydrobromide Anti-cough 7 19
Phenylephrine Hydrochloride Anti-cough 7 18
Levodopa CNS 11 15
Nabumetone Anti-Inflammatory 10 18
Page 46
Divi’s Laboratories (DIVI) CMP
Rs.1,764
Target
Rs. 2,186
Rating
BUY Carotenoids business to grow faster on a low base
Highest EBITDA margins
Source: Company, Spark Capital Research; * Syngene : 9MFY15 numbers shown for FY15
…. And Return on Equity amongst peers
Source: Company, Spark Capital Research; * Syngene : 9MFY15 numbers shown for FY15
Carotenoids on a strong growth trajectory
Source: Company , Spark Capital Research
Carotenoids industry estimated to reach $1.4 bn
by FY19
Source: Spark Capital Research
Apo-carotenal
2% Beta-
carotene 24%
Lutein 22%
Astaxanthin
18%
Capsanthin
10%
canthaxanthin 5%
Lycopene 6%
Others 13%
1,280 1,690
2,440
3,720
5,000
0
1,000
2,000
3,000
4,000
5,000
6,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Market share improvement to drive growth…
Divis offers a full range of carotenoids including
Beta-caratene, Lutein, Astaxanthin, and vitamins for
food & poultry purposes
Global market size of carotenoids is ~US$ 1.2 bn in
FY14 and is expected to reach US$ 1.4 bn by FY19
Segment contributes ~5% of sales currently
Sales started picking up from FY14 as it received
FSSC 22000 certification for nutraceuticals plant
Accreditation enabled company to supply
nutraceuticals to pharmaceutical use
We expect improvement in market share of existing
products and new product launches to boost growth
in Carotenoids business
44%
38% 37% 38% 40%
37%
10% 9% 13%
11% 9% 8%
23% 23%
21%
24% 24% 20%
32.5% 30.8% 32.9% 30.6% 30.7% 32.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY10 FY11 FY12 FY13 FY14 FY15
Divi's Laboratories Shasun Dishman Pharma Syngene*
25% 26%
27% 26% 26%
26%
26% 26%
48%
22%
11%
6%
15.8%
9.6%
6.3%
10.2% 9.9%
9.4%
15.7% 12.3% 23.9%
19.7% 20.4% 20.2%
0%
10%
20%
30%
40%
50%
FY10 FY11 FY12 FY13 FY14 FY15
Divi's Laboratories Shasun Dishman Pharma Syngene
Page 47
Divi’s Laboratories (DIVI) CMP
Rs.1,764
Target
Rs. 2,186
Rating
BUY Financial Summary
Improved capacity utilization to boost return ratios
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 18% over FY15-17E
Source: Company, Spark Capital Research
EBITDA to grow at a CAGR of 20% over FY15-17E
Source: Company, Spark Capital Research
Trades at 30-40% premium compare to others (1yr forward PE Graph)
Source: Bloomberg, Spark Capital Research
25,321
31,149 35,700
43,170
52,216
18%
23%
15%
21%
21%
0%
5%
10%
15%
20%
25%
0
10,000
20,000
30,000
40,000
50,000
60,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
10,145 11,652
13,729
16,792
20,792 40%
37%
38%
39%
40%
36.0%
36.5%
37.0%
37.5%
38.0%
38.5%
39.0%
39.5%
40.0%
40.5%
0
5,000
10,000
15,000
20,000
25,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margins (%)
28%
26% 27%
27%
28%
27%
25% 25% 26%
26%
23%
24%
25%
26%
27%
28%
29%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
500
1,000
1,500
2,000
2,500
3,000
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
May-1
2
Sep-1
2
Jan-1
3
May-1
3
Sep-1
3
Jan-1
4
May-1
4
Sep-1
4
Jan-1
5
May-1
5
12M fwd P/E
CM
P (
Rs.)
30x
5x
10x 15x
20x
25x
Page 48
Divi’s Laboratories (DIVI) CMP
Rs.1,764
Target
Rs. 2,186
Rating
BUY Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 25,321 31,149 35,700 43,170 Revenue 18.1% 23.0% 14.6% 20.9%
EBITDA 10,145 11,653 13,729 16,792 EBITDA 24.5% 14.9% 17.8% 22.3%
Depreciation 921 1,360 1,327 1,327 Adjusted PAT 28.5% 10.1% 20.0% 23.5%
EBIT 9,224 10,293 12,401 15,465 Margin ratios
Other Income 706 447 583 583 EBITDA 40.1% 37.4% 38.5% 38.9%
Interest expense 21 19 53 78 Adjusted PAT 30.5% 27.3% 28.6% 29.2%
Exceptional items / Forex gain / (loss) 0 0 0 0 Performance ratios
PBT 9,909 10,721 12,932 15,970 RoE 28.3% 26.4% 26.6% 27.3%
PAT (after minority interest) 7,733 8,515 10,216 12,616 RoIC 27.1% 25.3% 25.4% 25.8%
Adjusted PAT (after MI) 7,733 8,515 10,216 12,616 Core RoIC 29.7% 29.4% 30.5% 26.1%
Balance Sheet Fixed asset turnover (x) 1.6 1.5 1.5 1.6
Net Worth 29,634 34,953 41,753 50,642 Total asset turnover (x) 0.7 0.8 0.7 0.7
Total debt 179 261 1,026 1,405 Financial stability ratios
Other liabilities and provisions 1,182 1,332 1,498 2,050 Net Debt to Equity (x) (0.2) (0.2) (0.2) (0.3)
Current liabilities & provisions 6,111 7,505 10,840 13,109 Current ratio (x) 3.8 3.8 3.5 3.6
Total Networth and liabilities 37,105 44,051 55,117 67,206 Inventory and debtor days 239 223 250 250
Gross Fixed assets 18,890 21,858 25,358 28,858 Working capital days 217 197 200 200
Net fixed assets 13,663 15,271 17,443 19,616 Interest cover (x) 0.0 0.0 0.0 0.0
Investments 0 0 0 0 Valuation metrics
Cash and bank balances 5,424 7,982 10,288 14,474 Fully Diluted Shares (mn) 132.7
Other long term assets 0 0 0 0 Market cap (Rs.mn) 2,34,143
Current assets 18,018 20,799 27,386 33,117 Adjusted EPS (Rs.) 58.3 64.2 77.0 95.0
Total assets 37,105 44,052 55,118 67,206 P/E (x) 30.3 27.5 22.9 18.6
Cash Flows EV (Rs.mn) 2,28,898 2,26,422 2,24,881 2,21,074
Cash flows from Operations 6,287 8,488 8,292 10,482 EV/ EBITDA (x) 22.6 19.4 16.4 13.2
Cash flows from Investing -2,463 -2,968 -3,500 -3,500 BV/ share (Rs.) 223.3 263.3 314.6 381.5
Cash flows from Financing -2,887 -2,963 -2,485 -2,796 Price to BV (x) 7.9 6.7 5.6 4.6
Page 49
Dr Reddy’s Laboratories (DRL) CMP
Rs. 3,317
Target
Rs. 3,977
Rating
BUY
Stock performance
1m 3m 12m
DRRD -4% -3% 36%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial Summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 1,34,153 32,508 19,632 115.3 28.8 17.6 27.6% 18.7%
FY15 1,48,189 33,535 22,179 130.3 25.5 16.9 23.4% 14.8%
FY16E 1,66,929 39,319 25,923 152.3 21.8 14.3 21.3% 14.8%
FY17E 1,94,910 45,908 30,774 180.8 18.3 11.9 21.3% 15.6%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg DRRD IN
Shares o/s 170mn
Market Cap Rs. 565bn
52-wk High-Low Rs. 3,809-2,386
3m Avg. Daily Vol Rs. 1,183mn
Index member BSE100
Latest shareholding (%)
Promoters 25.5
Institutions 44.3
Public 30.2
Initiating Coverage Dr Reddy’s Laboratories (DRL) has changed its positioning over the years from an API company to a formulations
company and now to a specialty generics company focused primarily on complex drugs. Over the past few years DRL
has seen increasing stability in US business on the back of these complex products’ market shares. DRL continues to
maintain high market shares in drugs even post several quarters of launch viz Decitabine (83%), Fondaparinux (51%),
Azacitidine (60%), Ziprasidone (43%), Valganciclovir (59%) etc. We believe the same has been achieved through
meticulously planned launches and a well spent R&D expense. DRL has the highest R&D expense amongst peer Indian
companies (11.8% of FY15 sales). We believe DRL’s US pipeline continues to offer promise with multiple key launches
ahead like gNexium, gDiovan, gPropofol, gPristiq etc over the next 2 years. DRL’s domestic business has seen a sharp
revival of growth with 14% sales growth in line with industry for FY15. The only disappointment in FY15 has been
Russia business because of currency headwinds, but we also take note of the fact that constant currency growth in
Russian market for DRL was at a healthy 13%. We believe now with Rouble showing signs of stability, DRL would
benefit from its Russian operations as well. We like the long term R&D pipeline and vision of the company with spends
on Biosimilars, Dermatology, soft gels and other complex areas. We forecast a Sales / EBITDA / EPS CAGR of 14% /
17% / 18% over FY15-17E and initiate coverage with a BUY with a TP of Rs. 3,977 (22x FY17E EPS of Rs. 181).
US business strong and steady: DRL has shown an ability to launch complex drugs in the past and retain market share
over the years on its launches. We like the approach of the company and believe its high spend on R&D would continue to
support growth through complex product launches going ahead. The company expects its contribution from complex generics
(non-oral solids) to increase from 33% to 51% by 2020. DRL has 68 pending ANDAs out which 43 are Para IVs and 14 FTFs.
Pending filings include 2 transdermals and 2 topicals whereas the company will file its first liposomal in FY16E and the next in
FY17E. Assuming 8-10 launches in the US each year going ahead till FY17E, we forecast a sales CAGR of 17% over FY15-
17E.
India business on a healthy recovery path already: DRL’s India business underperformed industry growth in the past few
years because of lower growth in mature brands. However, FY15 growth of 14% has been in line with the industry. We
believe the growth recovery has been largely volume-led and represents improved portfolio mix and healthy share expansion,
especially for major products covered under the NLEM list. We believe this growth to be sustainable and forecast a sales
CAGR of 15% in this market over FY15-17E for DRL.
Russia constant currency growth remains robust; currency headwinds appear to be stabilizing: The sharp
depreciation of Rouble impacted DRL’s growth in FY15, however constant currency growth of 13% indicated inherent strength
continues in this market. We believe Russia remains an important market for DRL as a growth driver in the long term.
Choosing complexity and long term stability over anything else
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 50
Dr Reddy’s Laboratories (DRL) CMP
Rs. 3,317
Target
Rs. 3,977
Rating
BUY Business Overview
R&D cost highest among peers
Source: Company, Spark Capital Research
Geographical sales breakup (FY15)
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
(Rs. Mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E CAGR
Global Generics 53,341 70,244 82,564 105,166 120,556 135,544 159,908 15%
North America 18,996 31,889 37,846 55,302 64,734 73,340 88,008 17%
Europe 8,431 8,259 7,716 6,970 7,181 11,358 14,197 41%
India 11,690 12,931 14,560 15,714 17,870 20,551 23,633 15%
Russia & Other CIS 10,858 13,260 16,908 19,820 17,714 14,907 17,143 -2%
RoW 3,366 3,904 5,533 7,359 13,057 15,388 16,926 14%
PSAI 19,647 23,814 30,703 23,964 25,456 28,886 32,127 12%
Proprietary products 1,705 2,682 3,001 3,034 2,174 2,500 2,875 15%
North America 44%
Europe 5%
India 12%
Russia & Other CIS 12%
RoW 9%
PSAI 18%
6.8% 6.1%
6.7%
9.4%
11.8%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
FY11 FY12 FY13 FY14 FY15
Rs. M
n
R&D cost R&D cost % revenues
Page 51
Dr Reddy’s Laboratories (DRL) CMP
Rs. 3,317
Target
Rs. 3,977
Rating
BUY Building a niche product portfolio
Strong visibility in US pipeline
Source: USFDA, Company, Spark Capital Research; * 20mg
Market Share of complex products stable
Source: Company, Spark Capital Research
Complex drugs to drive sales growth
Source: Company, Spark Capital Research
API Product Expected Brand
Value
Known
players
Esomeprazole Nexium 2QFY16 6,000 8
Memantine Namenda 2QFY16 2,000 <10
Valsartan Diovan Any time 2,500 10
Palonosetron HCL Aloxi FY16 420 4
Propofol Diprivan FY16 100 4
Desvenlafaxine Pristiq FY16 600 3
Omeprazole/Sodium
Bicarbonate Zegerid FY17 30 4
Glatiramer Acetate Copaxone* FY17 1,500 4
Atomoxetine Strattera FY17 384 6
Imatinib Gleevec FY17 1,939 4
Clofarabine Clolar FY18 80 2
Sildenafil Viagra FY18 1,132 3
Ixabepilone Ixempra FY19 150 3
Bivalirudin Angiomax FY20 450 6
Plerixafor Mozobil FY20 720 4
Dexlansoprazole Dexilant FY21 250 4
Prasugrel Effient FY22 377 11
Sumatriptan; Naproxen
Sodium tablet Treximet FY25 100 1
Icosapent Ethyl Vascepa FY30 40 3
Naproxen And
Esomeprazole
Magnesium
Vimovo Unknown 50 1
Febuxostat Uloric Unknown 300 8
Bendamustine HCL Treanda Unknown 530 8
ANDA pipeline more complex than peers
Source: Company, Spark Capital Research
Focused on complex generics
Source: Company, Spark Capital Research
12
21
17 18
13 13 12
18
11
21
12
7
0
5
10
15
20
25
FY10 FY11 FY12 FY13 FY14 FY15
AN
DA
fil
ing
s
Filed Approved
Complex injectables
13
Softgel 5
Topicals 4
Oral solids 28
Complex orals
9
Injectable 9
Aug’14 May’15
Decitabine 94% 83%
Azacitidine 54% 60%
Divalproex ER 20% 21%
Zoledronic Acid (Reclast) 65% 61%
Sumatriptan Autoinjector 21% 24%
912 1,054
1,183
1,419
1,653
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY14 FY15 FY16E FY17E FY18E
US
$ M
n
Page 52
Dr Reddy’s Laboratories (DRL) CMP
Rs. 3,317
Target
Rs. 3,977
Rating
BUY India business on recovery path; Currency remains a key risk for Russia & Venezuela
India business sales growth back on track
Source: Company, Spark Capital Research
Turnaround on the back of
Currency risk remains but business growth phenomenal
Source: Company, Spark Capital Research
Ruble growth in Russia still strong
Source: Company, Spark Capital Research
3,493
4,207 3,913 4,101 3,999
4,799 4,328
4,744
0%
4%
8%
12%
16%
20%
0
1,000
2,000
3,000
4,000
5,000
6,000
Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15
Rs. M
n
India business sales Growth
19% 22%
28%
17%
-11%
12% 15%
18%
11% 13%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
FY11 FY12 FY13 FY14 FY15
Gro
wth
Russian sales growth (INR) Russian sales growth (Ruble)
26 26 35
48
136
0 0% 35% 37%
183%
0%
40%
80%
120%
160%
200%
0
20
40
60
80
100
120
140
160
FY11 FY12 FY13 FY14 FY15
US
$ M
n
Venezuela Sales ($mn) Growth (%)
DRL took a conservative approach
with a write-off of Rs843mn in Q4FY15
Focused sales & marketing efforts on mega brands
Improving new launch productivity
Scale-up in institutions sales
Focus on Chronic and Super-specialty therapies
Strategic business development and M&A efforts
Differentiated assets in relevant therapies
Growth through inorganic opportunities
Page 53
Dr Reddy’s Laboratories (DRL) CMP
Rs. 3,317
Target
Rs. 3,977
Rating
BUY Entry into biosimilars & focus on mAbs development
Complex drugs WIP
Source: Company, Spark Capital Research
Biosimilars which DRL is targeting….
Source: Company, Spark Capital Research
Biosimilar opportunity +15bn even conservatively
Source: Company, Spark Capital Research
Current
pipeline
Future
products
Addressable
market Key developments
Microspheres 2 2 $2.5bn Full Integration of Octoplus synergies with Global injectable platform completed
Liposomals 2 1 $1bn Two near term filings i.e. One each in FY’16 and FY’17
Particulate systems 2 2 $2bn Early POC work through academic partnerships
Ready to use 4 Multiple $3.1bn Four near terms filings, working on 505b(2) approach on a large number of candidates
Derma 7 >5 $3.5bn Filed Three ANDAs in FY’15
Transdermal 3 1 $1.9bn Two patches filed till date.
Acquisition of Habitrol
Soft gels 3 3 $1bn Commercialised Isotretinoin in US both as a branded and generic product
Respiratory 3 2 $3bn Launched Levalbuterol
S No Molecule 2014 Sales ($Bn)
1 Adalimumab 12.5
2 Cetuximab 1.9
3 Infliximab 9.2
4 Ustekinumab 2.1
5 Tocilizumab 1.4
6 Denosumab 2.3
7 Aflibercept 2.8
8 Pertuzumab 1.0
9 Abatacept 1.6
10 Omalizumab 1.6
$70bn+ of Biologics Losing Patent Protection
30% biosimilar penetration in the US, 40-50%
biosimilar penetration ex-US
30-40% Pricing Discount to Brand
$15bn+ biosimilars Market
Individual revenue potential very
sizeable and relevant
Source: Company, Spark Capital Research
Brand revenue at expiry 3,500
Approved players 4
Assuming high price erosion
(conservative view) 60%
Revenue potential from drug for
each player 350
Present sales of DRL in US ($bn) 1,053
% of present sales 33%
Page 54
Dr Reddy’s Laboratories (DRL) CMP
Rs. 3,317
Target
Rs. 3,977
Rating
BUY Financials
Return ratios to be steady
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 15% over FY15-17E
Source: Company, Spark Capital Research
EBITDA to grow at a CAGR of 17% over FY15-17E
Source: Company, Spark Capital Research
1Yr forward P/E graph
Source: Bloomberg, Spark Capital Research
134,1
53
148,1
89
166,9
29
194,9
10
222,6
62
13%
10%
13%
17%
14%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
50,000
100,000
150,000
200,000
250,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
32,5
08
33,5
66
39,3
19
45,9
08
52,4
51
24.2%
22.7%
23.6% 23.6%
23.6%
21.5%
22.0%
22.5%
23.0%
23.5%
24.0%
24.5%
0
10,000
20,000
30,000
40,000
50,000
60,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margin (%)
28%
23% 21% 21% 21%
19%
15% 15% 16% 16%
0%
5%
10%
15%
20%
25%
30%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Oct-
11
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
Jan-1
4
Apr-
14
Jul-14
Oct-
14
Jan-1
5
Apr-
15
12M fwd P/E
CM
P (
Rs.)
25x
10x
13x
16x
19x
22x
Page 55
Dr Reddy’s Laboratories (DRL) CMP
Rs. 3,317
Target
Rs. 3,977
Rating
BUY Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 1,34,153 1,48,189 1,66,929 1,94,910 Revenue 12.8% 10.5% 12.6% 16.8%
EBITDA 32,508 33,535 39,319 45,908 EBITDA 19.5% 3.2% 17.2% 16.8%
Depreciation 6,475 8,166 9,146 9,530 Adjusted PAT 24.2% 13.0% 16.9% 18.7%
EBIT 26,033 25,369 30,173 36,378 Margin ratios
Other Income 1,697 917 1,600 1,600 EBITDA 24.2% 22.6% 23.6% 23.6%
Interest expense 1,267 -1,682 -863 -863 Adjusted PAT 14.6% 15.0% 15.5% 15.8%
Exceptional items / Forex gain / (loss) 0 0 0 0 Performance ratios
PBT 26,463 27,968 32,635 38,840 RoE 27.6% 23.4% 21.3% 21.3%
PAT (after minority interest) 19,632 22,179 25,923 30,774 RoIC 18.7% 14.8% 14.8% 15.6%
Adjusted PAT (after MI) 19,632 22,179 25,923 30,774 Core RoIC 22.7% 18.8% 17.5% 17.5%
Balance Sheet Fixed asset turnover (x) 1.2 1.2 1.2 1.3
Net Worth 78,652 1,11,302 1,32,104 1,57,211 Total asset turnover (x) 0.9 0.8 0.8 0.8
Total debt 41,362 43,126 40,882 40,882 Financial stability ratios
Other liabilities and provisions 2,985 5,158 7,402 7,402 Net Debt to Equity (x) 0.1 0.0 (0.0) (0.1)
Current liabilities & provisions 37,297 35,177 51,172 59,750 Current ratio (x) 2.8 3.4 3.0 3.1
Total Networth and liabilities 1,60,296 1,94,762 2,31,560 2,65,244 Inventory and debtor days 156 163 170 170
Gross Fixed assets 1,19,176 1,35,686 1,48,186 1,60,686 Working capital days 94 111 125 126
Net fixed assets 52,796 61,140 64,494 67,464 Interest cover (x) 0.0 (0.1) (0.0) (0.0)
Investments 4 3,851 3,851 3,851 Valuation metrics
Cash and bank balances 33,670 39,654 45,133 57,180 Fully Diluted Shares (mn) 170.2
Other long term assets 1,917 9,934 9,934 9,934 Market cap (Rs.mn) 5,64,686
Current assets 71,909 80,184 1,08,148 1,26,817 Adjusted EPS (Rs.) 115.3 130.3 152.3 180.8
Total assets 1,60,296 1,94,762 2,31,560 2,65,245 P/E (x) 28.8 25.5 21.8 18.3
Cash Flows EV (Rs.mn) 5,72,378 5,68,158 5,60,435 5,48,388
Cash flows from Operations 18,000 19,754 22,959 30,124 EV/ EBITDA (x) 17.6 16.9 14.3 11.9
Cash flows from Investing -13,078 -28,373 -12,500 -12,500 BV/ share (Rs.) 462.0 653.8 776.0 923.5
Cash flows from Financing 6,611 14,603 -4,980 -5,577 Price to BV (x) 7.2 5.1 4.3 3.6
Page 56
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY
Stock performance
1m 3m 12m
GNP 1% 5% 52%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 60,069 13,101 7,099 25.2 34.9 20.8 24.7% 13.9%
FY15 66,448 14,466 8,025 28.5 30.9 19.2 26.8% 14.0%
FY16E 80,609 18,943 11,212 39.8 22.1 14.1 26.8% 15.5%
FY17E 98,992 24,253 15,463 54.9 16.0 10.7 24.8% 17.6%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg GNP IN
Shares o/s 282mn
Market Cap Rs. 248bn
52-wk High-Low Rs. 941-531
3m Avg. Daily Vol Rs. 1,000mn
Index member BSE100
Latest shareholding (%)
Promoters 48.3
Institutions 40.8
Public 10.9
Initiating Coverage Glenmark Pharma is at an interesting stage of transition where the year gone by (FY15) was dull (11% sales growth and
13% adj. PAT growth), but the future should to be bright on the back of bunching up of high quality approvals in the US
in particular. The company got severely impacted due to sharp depreciation of the Ruble in its Russia business (ROW
sales declined 19% in FY15). However, 5 approvals received towards the latter part of FY15 including the launch of
gSeretide inhaler provides visibility on future growth. India business continues to tread on a steady path (FY15 sales
growth 16%). We believe Glenmark is on the cusp of a revival with visible growth across the board and the same is
reflected in company’s FY16 guidance of 18-20% sales growth and 22.5% EBITDA margins. Having received 6
approvals in US in the last 6 months and Ruble coming back to some stability, we believe the guidance though healthy
remains conservative. We initiate with a BUY and a TP of Rs 1120 (20x FY17E EPS + Rs 22 for gZetia FTF sales).
US sales to see sharp pick up: Glenmark has 70 ANDAs pending for approval and bulk of these are more than 30 months
old filings. We believe important launches going ahead like gFinacea, Ortho Tri-Cyclen Lo, gZetia and gWelchol would see
limited competition and create significant delta in sales and profitability. We are not building in gFinacea in our estimates
(leaving upside risk) because of pending litigations. We are factoring in cash of $100mn from gZetia FTF opportunity.
ROW, Lat-Am, EU and India business to deliver strong growth: We believe ROW sales would grow at a CAGR of 20%
over FY15-17E on the back of new product launches. EU business continues to do well with improved penetration and new in-
licensed molecules seeing launches. Company’s own products have also started to ramp up in EU markets. India business is
on a steady path and we expect growth to further improve to 19% CAGR over FY15-17E in line with the improvement in the
market itself. Lat-AM business has seen pick up in Brazil approvals and Venezuela growth. Although write-offs on account of
Venezuelan Bolivar devaluation continue to pose a risk to this geography.
Balance sheet issues in the vicinity of waning off: Glenmark’s PE has historically been lower because of balance sheet
issues (high debt, high working capital days and intangibles on the book). However, we also realize that Glenmark’s NCE
business R&D expense (~4% of FY15 sales) dilutes its EBITDA margins, without fetching any value to stock price. These two
factors hence neutralize each other. We believe the PE for the stock which is at a discount to sector leaders is hence justified.
However, Glenmark has displayed remarkable success in its NCE pipeline completing 7 out-licensing deals with a cumulative
payment of $217mn received. We present our take on the net impact of writing off intangibles completely versus the NCE
income. We believe Glenmark’s stock price should benefit materially whenever it writes off the intangibles against one-time
cash inflows like out-licensing income / FTF opportunities (gFinacea / gZetia). Management in the past has indicated an
interest is taking such a step and we foresee Glenmark having multiple opportunities over the next 2 years to write off
intangibles completely. The same poses a material upside risk to our target price.
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
At an inflection point; Balance sheet cleansing opportunities in sight
Page 57
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY
Complex products filings lead to increase in R & D cost
Source: Company, Spark Capital Research
Geographical sales break up FY15
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
Business Overview
Rs. Mn FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E CAGR
India 8,623 10,021 13,096 15,105 17,490 20,813 24,975 19%
USA 8,352 12,137 16,887 20,270 20,398 25,431 31,789 25%
RoW 4,141 5,926 8,122 9,856 8,123 9,641 11,762 20%
Europe 2,112 3,008 3,724 5,907 7,265 9,524 12,978 34%
Latin America 2,360 3,012 3,468 4,046 7,687 9,164 1,1452 22%
API 2,746 3,094 3,976 5,291 6,053 6,035 6,035
Out-licensing 895 2,535 493 118 299 0 0
Others 271 474 357 62 0 0 0
India26.0%
USA30.3%
RoW12.1%
Europe10.8%
Latin America11.4%
API9.0%
Out-licensing 0.4%
Others0.0%
Innovator : Generic break up – 43: 57 in FY15
773 1,380
2,916 4,116
5,998 6,760
3%
5%
7% 8%
10% 10%
0%
2%
4%
6%
8%
10%
12%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY10 FY11 FY12 FY13 FY14 FY15
Rs. M
n
R&D Cost R & D cost % sales
Page 58
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY US approvals & launches remain key
New inspections / issues unlikely in facilities in FY16 / 1HFY17
Source: Spark Capital Research
US sales remained flat over 6 quarters on account of…
Source: Company, Spark Capital Research
Differentiated product filings to drive growth and profitability
Source: Company, Spark Capital Research
...delay in product approvals
Source: Company, Spark Capital Research; *as on 31st May 2015
Focus Area Pending
approval
Authorized to
Distribute
Total
filings
Market size
($Mn)
Immediate release 31 47 78 25,391
Hormones 11 14 25 2,467
Modified release 4 9 13 1,763
Dermatology 9 24 33 2,131
Complex injectables 5 0 5 1,284
Immunosuppressant 2 0 2 901
Oncology-Injectables 8 0 8 2,919
Controlled substances 0 4 4 197
Total 70 94 168 37,056
Para IV filings 33 0 33
80.1
90.1
85.0
81.1 81.7 81.7 81.8
86.2
74.0
76.0
78.0
80.0
82.0
84.0
86.0
88.0
90.0
92.0 Q
1F
Y14
Q2F
Y14
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
US
$ M
n
3
6
3
7
10
1
4 3
4 4
0 0 1
2 1
2 3
0
2
4
6
8
10
12
Q1F
Y14
Q2F
Y14
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
Q1F
Y16*
Nu
mb
er
of
AN
DA
s
Filed Approved
Approvals beginning
to pick up
Type of facility City Inspection year
API Ankleshwar Feb 2015
Formulations Baddi, Himachal Pradesh State Apr 2015
Formulations Indore 25-Oct-13
Formulations Pilar, Argentina May 2014
API Goa May 2014
Page 59
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY
336 331
417
521
615
0
100
200
300
400
500
600
700
FY14 FY15 FY16E FY17E FY18E
US
$ M
n
US sales
US launches – Interesting and assured launches ahead
Key US opportunities
Source: Spark Capital Research
gZetia – Cash flow enhancement opportunity
Settled the patent infringement lawsuit with Merck
Will launch the drug on 16th Dec 2016 with 180 days
of exclusivity
Tied up with Par Pharma to markets the generic in
US
Par and Glenmark will share the profits
Expect cash inflow of US$ 100 mn from this product,
which should be used for repayment of debt
Source: Spark Capital Research
US sales at an inflection point
Source: Company, Spark Capital Research; Sales exclude gZetia
API Brand Innovator Therapy Brand size
US$ Mn
Expected
launch
Fenofibrate (Choline) Trilipix AbbVie Cardiovascular 215 Up on
approval
Linezolid Zyvox Pfizer Anti-infective 450 H1FY16
Colesevelam HCl Welchol Daiichi High cholesterol and type 2
diabetes 300 Q1FY16
Rosuvastatin Crestor Pfizer CVS 3,100 Q1FY17
Norgest + Ethiny Estradiol Ortho Tri Cyclen Lo Johnson &
Johnson Oral contraceptive 400 Q3FY16
Darifenacin Enablex Warner Chilcott Urology 180 Q2FY17
Ezetimibe Zetia Merck CVS 1,860 Q3FY17
Bosentan Tracleer Actelion Pharma Respiratory 35 Q3FY17
Lacosamide Tablets Vimpat UCB Inc Partial-onset seizures 353 FY17/FY22
Pemetrexed Alimta Elilly Oncology 1230 Jan-17/
FY'21
Prasugrel Effient Eli Lilly CVS 377 Q1FY18
Atomoxetine HCL Strattera Eli Lilly Attention-deficit hyperactivity
disorder 384
FY17/Q1FY1
8
Dronedarone HCL Multaq Sanofi Atrial fibrillation 320 2018
Mycophenolic Acid Myfortic Novartis Organ rejection 149 Q4FY18
Azelaic Acid Gel Finacea Bayer Rosacea 111 Q3FY19
Solifenacin Vesicare Astellas Urology 350 Q4FY19
Aprepitant Emend Merck Oncology 200 2019
Deferasirox Exjade Novartis Oncology 310 2019
Nebivolol Bystolic Forest CVS 400 Q3FY22
Bortezomib Velcade Millennium Pharma Oncology 693 Q4FY22
Rufinamide Banzel Eisai Epilepsy 78 Q4FY23
Milnacipran HCl Savella Cypress
Biosciences Leukemia 106 Q1FY24
Desmopressin Acetate DDAVP Ferring Anti-diuretic 100 FY24
Bendamustine HCL Treanda Teva Leukemia 530 Unknown
Saxagliptin Onglyza AstraZeneca CVS 516 Unknown
Carvedilol Coreg GSK CVS NA Unknown
Page 60
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY Steady growth in India + Recovery in ROW
New launches in Brazil, Venezuela & Mexico to support growth
Source: Company, Spark Capital Research
India: Consistently growing above industry
Source: Company, Spark Capital Research
FY10 FY11 FY12 FY13 FY14 FY15
Company Gr. (%) 21.7% 23.9% 26.4% 18.0% 17.7% 16.0%
Industry Gr. (%) 17.7% 15.3% 15.0% 10.1% 10.1% 13.0%
Market share 1.46% 1.56% 1.69% 1.82% 1.95% 2.04%
Cardiology 2.00% 2.35% 2.86% 3.28% 3.62% 3.80%
Dermatology 8.00% 8.34% 8.69% 8.69% 8.05% 8.04%
Respiratory 2.22% 2.67% 2.84% 3.33% 3.48% 3.80%
Gynecology 1.08% 1.25% 1.43% 1.38% 1.52% 1.42%
gSeretide + stabilizing Ruble + other launches to drive growth
Source: Company Spark Capital Research
Currency remains a risk – Although stability emerging in recent quarter
Source: Company, Spark Capital Research
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15
INRRUB
Forex loss
3QFY15: Rs 1,060 mn
4QFY15: Rs 510 mn
Venezuela and
Mexico
boosted sales
in FY15
3,468 4,046
7,687 9,164
11,452
14,312
15 17
90
19 25 25
0
20
40
60
80
100
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY13 FY14 FY15 FY16E FY17E FY18E
(%)
Rs. M
n
Latin America Gr. (%)
9,856
8,123
9,641
11,762
14,350
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
RoW
Page 61
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY Novel pipeline could surprise
Type Molecule Indication Out/In license Current status Remarks
NCE Crofelemer HIV Related Diarrhea In-licensed from
Napo Pharma
Waiting for
approval in RoW
markets
The company has already filed the drug in 13 countries and received
approval in Ecuador, Zimbabwe and Botswana.
It has exclusive marketing and distribution rights for 140 countries.
We expect approvals are one year away.
The Aurangabad API manufacturing site received US FDA approval
in August 2014.
NCE GRC 17536
Neuropathic pain None Phase IIa Positive data in Phase IIa studies conducted in EU & India.
It has started out-licensing discussions but is also open to conduct
Phase IIb on its own.
The side effect profile of molecule for Neuropathic pain is better than
competing molecules like Pregablin, Cymbalta.
Expects to file IND in 2QFY16. Respiratory disorders None Phase IIa
NCE GRC 27864 Chronic inflammatory conditions
including pain
Collaboration with
Forest Laboratories Phase I
Filed for Phase I human trials with UKMHRA
Single ascending dose study has been completed and multiple
ascending dose study is currently on-going
Received $15 mn as upfront and milestone payment from Forest
NBE GBR 500
Vatelizumab Multiple Sclerosis
Out-license to
Sanofi Phase II
Sanofi is conducting Phase II and data is expected in CY16.
So far it has received $55 mn as milestone and upfront payment
NBE GBR 900 Chronic Pain In-licensed from
Lay Genom Phase I
Phase I enabling toxicity studies have been completed and clinical
trial has been initiated in the UK.
NBE GBR 830 Autoimmune Disorders None Phase I Phase I clinical trial has been initiated in Netherlands, EU.
NBE GBR 1302 Breast & Ovarian cancer None Pre-Clinicals
IND enabling studies initiated for the molecule.
The company expects to obtain approval for the initiation of clinical
studies during 1QFY16
Page 62
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY CMP indicates 40% discount to sector leader on core EPS
Writing off intangibles on balance sheet against NCE out-licensing income / FTF cash inflows would mean 40% upside (even without any PE multiple re-rating)
Source: Company, Spark Capital Research
Intangibles on Balance Sheet can be written off against NCE out-licensing income / FTF cash inflows Scenario Today FY16E Assuming intangibles
are written off by FY17E
Reported numbers lowered on account of NCE R&D spend $ mn $ mn
Annual NCE R&D spend run-rate 47 47
Tax benefit on NCE R&D @ effective tax rate (Not 200% deduction as IP based out of Swiss subsidiary) 11 11
Unadjusted PAT (including NCE R&D expense) 181 249
PAT should be higher by 36 36
Inflation of reported numbers by Capitalization of Intangibles
Net Intangibles on balance sheet (FY15) 200 0
Ideal amortization run-rate for intangibles to be written off completely in 5 years 40 0
Actual amortization in FY15 23 0
PAT should be lower by (adjusted for tax deduction on higher amortization) 13 0
Combined net impact of NCE spend and Intangibles amortization, PAT should be higher by 23 36
Adjusted PAT 204 285
Adjusted EPS (Rs) 44.9 62.8
CMP (Rs) ~850
Implied PE 19 19
Sector leaders 1 year forward Bloomberg P/E average (Sun, Lupin, DRL) 25 25
Implied Discount 32% 32%
Implied Stock Price assuming discount remains same to sector leaders 1,188
CMP discount to fair value on Core EPS (excluding NCE spend and excluding Intangibles) 40%
Page 63
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY Financial summary
EBITDA margins to expand going ahead
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 22% over FY15-17E
Source: Company, Spark Capital Research
1 yr-forward PE graph
Source: Bloomberg, Spark Capital Research
Return rations remains strong
Source: Company, Spark Capital Research
Sharp improvement in Net debt/EBITDA
Source: Company, Spark Capital Research
60,069 66,448
80,609
98,992
120,206
20%
11%
21% 23%
21%
0%
5%
10%
15%
20%
25%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
13,101 14,466
18,943
24,253
29,450
22% 22%
24%
25% 25%
20%
21%
22%
23%
24%
25%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA Margin (%)
1.9 2.1
1.0
0.5
0.1
0.1
0.6
1.1
1.6
2.1
2.6
FY14 FY15 FY16E FY17E FY18E
X t
imes
Net Debt/ EBITDA
25%
27% 27%
25% 24%
14% 14% 16%
18% 20%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
200
400
600
800
1,000
1,200
Jan-0
9
Jun-0
9
Nov-0
9
Apr-
10
Sep-1
0
Fe
b-1
1
Jul-11
Dec-1
1
May-1
2
Oct-
12
Mar-
13
Aug-1
3
Jan-1
4
Jun-1
4
Nov-1
4
Apr-
15
12M fwd P/E
CM
P (
Rs.)
25x
10x 13x
16x 19x
22x
Page 64
Glenmark Pharmaceuticals (GPL) CMP
Rs. 880
Target
Rs. 1,120
Rating
BUY Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 60,069 66,448 80,609 98,992 Revenue 19.8% 10.6% 21.3% 22.8%
EBITDA 13,101 14,466 18,943 24,253 EBITDA 29.5% 10.4% 30.9% 28.0%
Depreciation 2,168 2,600 2,779 2,930 Adjusted PAT 15.5% 13.0% 39.7% 37.9%
EBIT 10,933 11,866 16,164 21,322 Margin ratios
Other Income 97 69 43 41 EBITDA 21.8% 21.8% 23.5% 24.5%
Interest expense 1,886 1,902 1,551 1,151 Adjusted PAT 11.8% 12.1% 13.9% 15.6%
Exceptional items / Forex gain / (loss) 1,676 3,271 0 -3,100 Performance ratios
PBT 9,144 10,034 14,656 20,213 RoE 24.7% 26.8% 26.8% 24.8%
PAT (after minority interest) 5,423 4,753 11,212 18,563 RoIC 13.9% 14.0% 15.5% 17.6%
Adjusted PAT (after MI) 7,099 8,025 11,212 15,463 Core RoIC 15.3% 15.3% 17.3% 17.5%
Balance Sheet Fixed asset turnover (x) 1.8 1.6 1.8 1.9
Net Worth 29,832 30,004 53,759 71,003 Total asset turnover (x) 0.8 0.7 0.8 0.8
Total debt 32,670 37,999 31,002 23,835 Financial stability ratios
Other liabilities and provisions 2,592 3,606 3,604 2,771 Net Debt to Equity (x) 0.8 1.0 0.3 0.2
Current liabilities & provisions 21,109 24,857 24,007 23,170 Current ratio (x) 2.3 2.3 3.0 3.4
Total Networth and liabilities 86,336 96,465 1,12,370 1,20,777 Inventory and debtor days 188 208 186 187
Gross Fixed assets 38,413 43,338 48,338 53,338 Working capital days 112 138 157 156
Net fixed assets 30,959 33,284 35,505 37,575 Interest cover (x) 0.2 0.2 0.1 0.1
Investments 331 171 171 171 Valuation metrics
Cash and bank balances 8,007 7,681 12,690 12,065 Fully Diluted Shares (mn) 270.9
Other Long term assets 7,420 5,400 5,400 5,400 Market cap (Rs.mn) 2,47,896
Current assets 39,620 49,928 58,604 65,567 Adjusted EPS (Rs.) 25.2 28.5 39.8 54.9
Total assets 86,336 96,465 1,12,370 1,20,778 P/E (x) 34.9 30.9 22.1 16.0
Cash Flows EV (Rs.mn) 2,72,559 2,78,214 2,66,208 2,59,666
Cash flows from Operations 7,315 794 4,464 13,694 EV/ EBITDA (x) 20.8 19.2 14.1 10.7
Cash flows from Investing -6,802 -2,746 -5,000 -5,000 BV/ share (Rs.) 110.1 110.8 198.4 262.1
Cash flows from Financing 1,420 1,628 5,543 -9,318 Price to BV (x) 8.0 7.9 4.4 3.4
Page 65
Granules India (GIL) CMP
Rs. 78
Target
Rs. 97
Rating
ADD
Stock performance
1m 3m 12m
GRAN -10% -8% 88%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial Summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 10,959 1,584 753 3.7 20.9 12.2 23.9% 13.1%
FY15 12,929 2,086 909 4.5 17.3 9.3 12.9% 13.3%
FY16E 15,562 2,776 1,239 6.1 12.7 7.1 23.9% 16.2%
FY17E 18,333 3,414 1,631 8.1 9.6 5.4 23.1% 18.3%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg GRAN IN
Shares o/s 205mn
Market Cap Rs. 16bn
52-wk High-Low Rs. 104-37
3m Avg. Daily Vol Rs. 217mn
Index member BSE200
Latest shareholding (%)
Promoters 48.6
Institutions 4.1
Public 47.3
Initiating Coverage Till day, Granules India has been recognized globally as a low-end paracetamol API player. But, in our view, the
company has metamorphosed from merely being an API manufacturer into a high-end intermediates and formulations
supplier. The company’s key products include paracetamol, ibuprofen, and metformin. Its strong presence across the
value-chain makes Granules a preferred integrated player for global customers. Recently, it has acquired Auctus
Pharma, which has a USFDA-approved manufacturing facility and several products. This acquisition would help the
company to diversify its product basket. Its recent entry into the CRAMS business through the Ajinomoto OmniChem
JV bodes well for its long-term profitability, besides helping to upgrade the business quality a notch above peer pure
play API manufacturers. Granules ROEs have improved from 10% in FY11 to 13% in FY15, while ROICs have improved
from 11% to 13% during the same period. We believe the increased capacity utilization of the recently added capacity
and improvement in EBITDA margins in the coming years would help improve ROEs and ROICs to 23% and 18%,
respectively, by FY17E. We like the long term story although believe near term valuations do not allow significant room
for upside. We initiate with an ADD rating with a TP of Rs 97.
Strong positioning as an API player: Granules has invariably enjoyed a stronghold in the API market for the drugs it
supplies. The key APIs in the company’s kitty, wherein it has a good market share, include paracetamol, guaifenesin,
ibuprofen and metformin. We believe Granules’ positioning in these products has been advantageous vis-à-vis competition,
both in terms of quality and pricing. Granules management indicates that the company only produces those products for which
it feels it has a sustainable competitive advantage, whether it be a competitive cost position or the ability to offer multiple
products across the value-chain, including APIs, PFIs and FDs to its customers.
PFIs and finished dose contribution to increase: Realizing the need to move into higher value and higher profitability
business segments, Granules, over the years, has deliberately stepped up its contribution of finished dose products to total
sales. Also, PFI sales contributions have increased from 22% to around 24% in FY15. Incidentally, Granules is among the few
Indian players to have scaled up pharmaceutical formulation intermediates (PFI) to a meaningful level. PFIs is a novel concept
for large-volume blockbuster drug molecules within the pharmaceutical production, and offers significant savings for the
dosage form manufacturers, besides presenting fewer handling issues, fewer regulatory hurdles and better overall efficiency.
As an alternative to active pharmaceutical ingredients, the PFI concept is expected to transform the conventional
pharmaceutical manufacturing model, since an increasing number of companies are switching over to compounding of PFIs.
Creating long term value through JVs / acquisitions: In recent times, Granules has scaled up its top-line. It now intends to
improve profitability through some of the JVs and acquisitions it has made. The company also seeks to mitigate concentration
risks on select products.
Moving towards the right mix
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 66
Granules India (GIL) CMP
Rs. 78
Target
Rs. 97
Rating
ADD Business Overview
Manufacturing facilities
Source: Company, Spark Capital Research
Sales break up (FY15)
Source: Company, Spark Capital Research; PFIs; Pharmaceutical
formulations intermediate
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E GAGR
APIs 1,523 1,817 2,534 3,236 4,884 2,607 2,296 -31%
PFIs 1,563 2,006 2,223 3,263 3,034 3,618 4,878 27%
Formulations 1,036 1,883 2,035 3,518 4,215 6,811 8,322 41%
Auctus Pharma 0 0 0 72.7 1,153.0 1,384 1,660 20%
Granules Biocause 630 803 799 986 1,111 1,143 1,177 3%
APIs 44%
PFIs 24%
Formulation Dosage
32%
Product
Category
Facility
Location Product
Capacity
(MTPA) Approvals
API Bonthapally Paracetamol 14,400 USFDA, EDQM, WHO GMP
API
Jeedimetla
Metformin 2,000
USFDA, KFDA, TGA, EDQM Guaifenesin 1,200
Methocarbamol 360
API (Biocause
JV) Jingmen, China Ibuprofen 4,800
USFDA, MHRA, EDQM, TGA, KFDA, Health
Canada
PFI Gagillapur Multiple PFIs 17,200 USFDA, EDQM, TGA, GHCA
PFI Jeedimetla Multiple PFIs 1,200 HHA (Germany)
FD Gagillapur Tablets &
Capsules
18 bn
Units USFDA, EDQM, TGA, GHCA
API (CRAMS) Vizag Multiple Products NA Construction completed (USFDA & EDQM
Compliant)
API (Auctus) Vizag Multiple Products NA USFDA, EDQM, WHO GMP, KFDA, Health Canada
Intermediates Bonthapally Multiple Products NA NA
Page 67
Granules India (GIL) CMP
Rs. 78
Target
Rs. 97
Rating
ADD Forward integration to improve margins
Strong presence in regulated markets
Source: Company, Spark Capital Research
Product mix improving towards FDs
Source: Company, Spark Capital Research
Strong foothold in key molecules
Source: Company, Spark Capital Research
Market (TPA) Demand Supply Supply Gap
Regulated markets 46,500 44,200 2,300
RoW markets 53,500 97,000 -43,500
Paracetamol Suppliers (TPA) Supply Market share
Mallinckrodt 25,000 56%
Granules 14,400 30%
Novocel 6,000 14%
Ibuprofen Suppliers (TPA)
Shasun 6,000 20%
IOL Chemicals 6,000 20%
Albemarle 5,200 17%
BASF 5,000 17%
Granules Biocause 4,800 16%
Metformin Suppliers (TPA)
Granules 2,000 5%
USV 10,100 28%
Wanbary 9,000 25%
Harman 6,000 17%
Methocarbamol Suppliers (TPA)
Granules 360 31%
Synthochem 250 22%
Guaifenesin Suppliers (TPA)
Granules 1,200 26%
Synthochem 800 17%
Market demand growth globally
Paracetamol 4%
Ibuprofen 2%
Metformin 9%
Pioneer in commercializing PFIs Pharmaceutical Formulation intermediates (PFIs) is the
intermediate product between API and finished
dosage.GIL is pioneer in commercializing PFIs
GIL’s concept is based on ‘ready-to-compress’ mix of
APIs and excipients that could help compress &
manufacture finished dosage into a one-step process.
This process is known as granulation
Expenditure to build granulation facility account 80% of
formulation facility capex and the process contributes
80% of total process cost
Outsourcing PFIs significantly save capex, time and
resource utilization for companies
GIL has a 6-ton batch size, which is highest amongst
others. This helps company tp manufacture tablets
more efficiently
As majority of formulation manufacturing process is
handled by company, it is difficult for customer switch to
other suppliers
Capacity ramp up progressing well
Source: Company, Spark Capital Research
12,9
30
5,4
70
2,0
01
14,1
12
7,5
90
3,4
49
17,7
34
7,7
08
3,7
40
19,9
06
10,1
62
5,7
13
21,3
82
10,2
26
6,2
15
-
5,000
10,000
15,000
20,000
25,000
APIs (MT) PFIs (MT) FDs (Mn)
Cap
acit
y
FY11 FY12 FY13 FY14 FY15
10% 10% 7% 14% 10%
24% 23% 31% 30% 32%
29% 42% 34% 29% 31%
19%
14% 12% 15% 11%
18% 11% 15% 13% 16%
0%
20%
40%
60%
80%
100%
FY 11 FY 12 FY 13 FY 14 FY15
% t
o s
ale
s
AMEA N. America Europe LATAM India
46% 40% 44% 39% 44%
33% 31%
29% 29% 24%
21% 29% 27% 32% 32%
32%
34%
36%
38%
40%
42%
44%
0%
20%
40%
60%
80%
100%
FY11 FY12 FY13 FY14 FY15
% t
o s
ale
s
API PFIs FDs GPM (%)
Page 68
Granules India (GIL) CMP
Rs. 78
Target
Rs. 97
Rating
ADD
JV sales to pick up from FY17E onwards
Source: Company, Spark Capital Research
206 300
700
1,000
0
200
400
600
800
1,000
1,200
FY15 FY16E FY17E FY18E
Rs. M
n
Omnichem JV
Auctus sales grow 20% CAGR over FY15-17E
Source: Company, Spark Capital Research
73
1,153
1,384
1,660
1,992
0
500
1,000
1,500
2,000
2,500
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Auctus sales
Strategic decisions of Auctus acquisition & Omnichem JV to pay off
Auctus acquisition improves….
Acquired Auctus Pharma for Rs 1.2 bn
Auctus has a product basket of 12 high value APIs
Addition of one USFDA approved API facility and an
intermediate facility
Auctus filed 22 DMFs including 8 in EU and 4 in the US
Majority of Auctus current sales comes from domestic
market
Realisations should significantly improve going ahead as
it is planning to expand reach to regulated markets. eg:
Demand of Valsartan in RoW and US is ~240 MT and
307 MT. However, the estimated market size is $4.1bn
and $2.3bn
Planning to file ANDAs for these molecules
Aiming to raise the FD contribution to 65% from current
32% over the next 5 years
Source: Company, Spark Capital Research
…. product basket and….
Source: Company, Spark Capital Research
…reduces product concentration
Source: Company, Spark Capital Research
Omnichem JV enables CRAMS opportunity
Granules has set up a 50-50 JV with Omnichem in July
2011
The JV allow Granules to enter CRAMS business
without making significant investment in R&D
The JV has recently commissioned facility in Vizag SEZ
to manufacture high-value APIs for existing customers of
Omnichem
Facility will take 18 months to get regulatory approvals.
Till that time, JV will manufacture API intermediates
Omnichem will initially shift 6-7 products
The JV will also develop second generation
manufacturing processes to boost efficiency
Expect sales to pick up from FY17E onwards
Source: Company, Spark Capital Research
Product Val - $bn Vol - MT
Valsartan 8.7 1,054
Clopidogrel 5.2 572
Pregabalin 4.8 342
Olmesartan 4.5 97
Pantoprazole 3.4 338
Losartan 3.2 662
Telmisartan 3.1 259
Cetrizine 1 58
Flu Conazole 1 87
Rifaximin 0.8 85
Levocetrizine 0.6 15
Doxylamine 0.6 40
Total 36.9 3,609
16% 11%
5% 5%
41%35%
36%
27%
3%20%
0%
20%
40%
60%
80%
100%
FY14 FY15
Guaifenesin Metformin Methocarbamol
Paracetamol Ibuprofen others
Page 69
Granules India (GIL) CMP
Rs. 78
Target
Rs. 97
Rating
ADD Financials
Revenues to grow at a CAGR of 19% in FY15-17E
Source: Company, Spark Capital Research
Change in product mix should improve margins steadily
Source: Company, Spark Capital Research
Return ratios to improve going ahead
Source: Company, Spark Capital Research
Debt to EBITDA to improve further
Source: Company, Spark Capital Research
1 Yr forward PE
Source: Bloomberg, Spark Capital Research
2.3
1.8
1.4
0.8
0.3
1.0 0.9
0.7
0.4
0.1 0.0
0.5
1.0
1.5
2.0
2.5
FY14 FY15 FY16E FY17E FY18E
(X)
Net Debt/EBITDA Net Debt/ Equity
24%
13%
24% 23% 25%
13% 13%
16% 18% 19%
0%
5%
10%
15%
20%
25%
30%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
10,959 12,929
15,562
18,333
21,203 43%
18% 20%
18% 16%
0%
10%
20%
30%
40%
50%
0
5,000
10,000
15,000
20,000
25,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
1,584
2,086
2,776
3,414
4,160
14%
16%
18%
19%
20%
12%
15%
18%
21%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA Margins (%)
0
20
40
60
80
100
120
140
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-13
Sep-1
3
Nov-1
3
Jan-1
4
Mar-
14
May-1
4
Jul-14
Sep-1
4
Nov-1
4
Jan-1
5
Mar-
15
May-1
5
12M fwd P/E
CM
P (
Rs.)
19x
4x
7x
10x
13x
16x
Page 70
Granules India (GIL) CMP
Rs. 78
Target
Rs. 97
Rating
ADD Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 10,959 12,929 15,562 18,333 Revenue 43.4% 18.0% 20.4% 17.8%
EBITDA 1,584 2,086 2,776 3,414 EBITDA 84.0% 31.7% 33.1% 23.0%
Depreciation 298 527 536 594 Adjusted PAT 123.9% 20.7% 36.3% 31.6%
EBIT 1,286 1,560 2,240 2,819 Margin ratios
Other Income 43 43 43 48 EBITDA 14.5% 16.1% 17.8% 18.6%
Interest expense 204 323 433 433 Adjusted PAT 6.9% 7.0% 8.0% 8.9%
Exceptional items / Forex gain / (loss) 0 0 0 0 Performance ratios
PBT 1,124 1,280 1,850 2,434 RoE 23.9% 12.9% 23.9% 23.1%
PAT (after minority interest) 753 909 1,239 1,631 RoIC 13.1% 13.3% 16.2% 18.3%
Adjusted PAT (after MI) 753 909 1,239 1,631 Core RoIC 13.2% 15.5% 25.2% 23.8%
Balance Sheet Fixed asset turnover (x) 2.2 1.9 2.0 2.1
Net Worth 3,559 4,312 5,409 6,875 Total asset turnover (x) 1.3 1.2 1.3 1.4
Total debt 4,101 4,331 4,331 4,331 Financial stability ratios
Other liabilities and provisions 303 493 0 0 Net Debt to Equity (x) 1.0 0.9 0.7 0.4
Current liabilities & provisions 1,956 2,836 2,389 2,669 Current ratio (x) 1.9 1.8 2.1 2.4
Total Networth and liabilities 9,919 11,971 12,130 13,876 Inventory and debtor days 95 101 101 101
Gross Fixed assets 6,268 7,345 8,245 9,145 Working capital days 18 9 24 24
Net fixed assets 5,976 5,901 6,265 6,570 Interest cover (x) 0.2 0.2 0.2 0.2
Investments 96 887 887 887 Valuation metrics
Cash and bank balances 418 653 332 1,492 Fully Diluted Shares (mn) 201.6
Other long term assets 35 28 28 28 Market cap (Rs.mn) 15,722
Current assets 3,395 4,502 4,617 4,898 Adjusted EPS (Rs.) 3.7 4.5 6.1 8.1
Total assets 9,920 11,971 12,129 13,875 P/E (x) 20.9 17.3 12.7 9.6
Cash Flows EV (Rs.mn) 19,406 19,400 19,721 18,561
Cash flows from Operations 1,018 1,208 1,213 2,225 EV/ EBITDA (x) 12.2 9.3 7.1 5.4
Cash flows from Investing -2,537 -1,235 -900 -900 BV/ share (Rs.) 17.7 21.4 26.8 34.1
Cash flows from Financing 1,608 263 -634 -165 Price to BV (x) 4.4 3.6 2.9 2.3
Page 71
Indoco Remedies (INDOCO) CMP
Rs.353
Target
Rs. 360
Rating
ADD
Stock performance
1m 3m 12m
INDR 8% 1% 121%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 7,326 1,204 666 7.2 48.8 27.5 15.3% 13.2%
FY15 8,570 1,655 828 9.0 39.3 20.1 17.0% 14.6%
FY16E 10,390 2,130 1,118 12.1 29.1 15.7 19.3% 16.8%
FY17E 13,134 2,824 1,654 18.0 19.7 11.6 22.8% 19.3%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg INDR IN
Shares o/s 92mn
Market Cap Rs. 32bn
52-wk High-Low Rs. 413-151
3m Avg. Daily Vol Rs. 32mn
Index member BSE200
Latest shareholding (%)
Promoters 59.3
Institutions 19.2
Public 21.6
Initiating Coverage Indoco Remedies is a very fast growing pharma company with healthy presence in India and increasing presence in
regulated markets. Indoco Remedies has placed itself amongst players with a unique US presence through a very
interesting and profitable deal with Watson for ophthalmic products. Indoco’s deal with Watson for supplies of
ophthalmic drugs has kicked off and its sales should gain further traction in FY16E and FY17E. Not only does this deal
put Indoco’s sales and profitability to a new orbit but also highlights the company’s ability in manufacturing complex
sterile ophthal drugs in its plants. The company came out strong from a long list of 483 issues for its Goa II plant when
it was cleared in August 2014. Although this did delay the launch of ophthal drugs by a few quarters, we do not see as
the opportunity to be lost. We are positive on Indoco’s US prospects and believe the best is yet to come from this deal.
We like Indoco’s domestic business with a very strong positioning in the stomatology and respiratory segments in
particular. Aspen deal for supplies into Non-US regulated markets and DSM API deal for supplies into emerging
markets are also strong growth drivers ahead. We do not like the company’s policy of capitalizing a part of its R&D
expenditure, but believe the company with improving profitability and cash flows going ahead should be able to take a
more aggressive write-off policy. We build in a Sales / EBITDA / EPS CAGR of 23% / 30% / 41% over FY15-17E and
initiate with an ADD with a TP of Rs. 360.
Watson deal to provide strong growth: Indoco has a contract for 23 drugs with Watson and has filed for 16 with 2 approvals
so far. The two drugs launched are gCostopt and gTrusopt. The company also has 3 Tentative approvals. Going ahead we
foresee a sharp ramp-up on this deal with the launch of gVigamox, gPatanol and gPataday over the next 12 months. We
believe the deal would fetch very high EBITDA margins to the company and should change profitability metrics significantly.
We are building in a sales CAGR of 136% from this deal over FY15-17E and sales of $39mn in FY17E with a launch
assumption of 6-8 drugs by then.
Domestic business steady: Indoco’s domestic business presence has been steady and the company has consistently done
well against industry growth over the past 3 years. Top brands of the company contribute more than 50% of its sales and key
segments like stomatology and respiratory enjoy better growth rates than overall industry. We forecast improving MR
productivity going ahead and new launches to help growth being maintained in the range of 18-20% for this business.
Aspen deal and DSM deal add another leg to the high growth: Indoco has deals in place with Aspen (for supplies to non-
US regulated markets) and DSM (API supplies for emerging markets) which are about to pick up their growth rates in FY16E
and FY17E. We believe these two add should another leg to the high growth trajectory for the company ahead. The company
did ~Rs200mn sales from Aspen deal in FY17E and we are building in a sales CAGR of 67% over FY15-17E for this deal.
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Strong sales growth with super-normal PAT growth ahead
Page 72
Indoco Remedies (INDOCO) CMP
Rs.353
Target
Rs. 360
Rating
ADD
Manufacturing facilities
Source: Company, Spark Capital Research
Sales Break up FY15
Source: Company , Spark Capital Research
Sales forecast
Source: Company, Spark Capital Research
Business Overview
Unit Name Form Compliance with
Goa I Tablets, Creams
& Ointments
USFDA, EU-GMP, TGA Australia, MCC South
Africa, Anvisa-Brazil
Goa II Sterile products USFDA, EU-GMP, TGA Australia, MCC South
Africa, Anvisa-Brazil
Goa III Tablets USFDA, EU-GMP, TGA Australia
Waluj Tablets Emerging markets
Baddi Tablets, Liquid orals & Toothpastes
Patalanga APIs USFDA, TGA Australia
Kilolab APIs USFDA, TGA Australia
(Rs. Mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-FY17E
CAGR
Domestic 3,220 3,575 4,070 4,614 5,301 6,302 7,533 19%
Formulations 3,073 3,382 3,904 4,386 5,048 5,998 7,169 19%
APIs 147 193 166 228 253 303 364 20%
Exports 1,565 2,017 2,187 2,544 3,168 3,996 5,509 32%
Regulated markets formulations 1,111 1,495 1,814 2,005 2,516 3,259 4,671 36%
Semi-Regulated markets formulations 305 360 195 307 387 458 545 19%
APIs 149 163 178 232 266 279 293 5%
Analytical & Testing income 2 7 7 15 25 28 28
India 59%
Regulated 30%
Semi-regulated 5%
APIs 6%
Others 0%
Page 73
Indoco Remedies (INDOCO) CMP
Rs.353
Target
Rs. 360
Rating
ADD Domestic formulations business: Steady
Top 10 brands continue to drive growth
Source: Spark Capital Research; sales of FY15 & FY14 in Rs. Mn
Respiratory and stomatology segments drive growth
Source: Company, Spark Capital Research
Rs. Mn FY12 FY13 FY14 FY15P FY16E FY17E FY18E
Respiratory 678 731 804 883 971 1,067 1,173
Stomatologicals 596 699 802 920 1,056 1,212 1,390
Anti-Infectives 559 624 676 757 847 949 1,063
Gastro Intestinal 454 550 610 677 751 833 924
Pain 219 303 350 420 505 605 727
Ophthalmic 185 225 248 272 299 329 362
Gynaec. 189 219 234 250 268 287 307
Vitamins 168 209 0 0 0 0 0
Others 335 345 663 868 1,302 1,888 2,586
To outpace industry growth
Source: Company, Spark Capital Research
Consistently launching new products in India market
Source: Company, Spark Capital Research
Brand Therapy % sales FY'15 FY'14 Var.(%)
Febrex Plus Respiratory 10.9% 727 666 9.2
Cyclopam Gastro Intestinal 6.2% 412 365 12.7
Sensodent-K Stomatologicals 5.9% 391 320 22.0
Oxipod Anti-Infectives 4.5% 300 240 25.3
Cital Urology 4.4% 293 243 20.6
Atm Anti-Infectives 4.1% 276 246 12.0
Sensoform Stomatologicals 3.3% 218 171 27.2
Cloben G Derma 3.0% 199 190 4.7
Sensodent-KF Stomatologicals 3.0% 202 167 21.0
Cyclopam Gastro Intestinal 2.7% 181 153 18.3
4,386 5,048
5,998
7,169
8,531
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Domestic formulations
19
14
37
24
19
0
5
10
15
20
25
30
35
40
FY11 FY12 FY13 FY14 FY15
No
. o
f p
rod
uc
ts
New launches in India
Page 74
Indoco Remedies (INDOCO) CMP
Rs.353
Target
Rs. 360
Rating
ADD
Product pipeline to the US market under Actavis deal
Source: USFDA, Bloomberg, Spark Capital Research
API Brand Innovator Used for Size Patent Competitions Indoco Presence
Dorzolamide + Timolol Cosopt Merck Glaucoma 14 Expired 6 Launched
Dorzolamide Trusopt Merck Glaucoma 444 Expired 7 Launched
Azelastine Hydrochloride Optivar Meda Allergy 50 Expired 4 Likely
Travoprost Travatan Z Alcon Pharma Glaucoma 462.3 Expired 1 Likely
Dorzolamide Trusopt Merck Glaucoma 444 Expired 7 Likely
Brinzolamide Azopt Alcon Pharma Glaucoma 110.1 Expired 1 Likely
Olopatadine Hydrochloride Pataday Alcon Pharma Allergy 259 2015 3 Para IV
Olopatadine Hydrochloride Patanol Novartis Allergy 223.8 2015 3 Likely
Moxifloxacin Hydrochloride Vigamox Novartis Infection 287.8 2019 4 Likely
Ciprofloxacin; Dexamethasone Ciprodex Novartis Infection 327.7 2020 NA Likely
Brimonidine Alphagan P Allergan Glaucoma 184.9 2021 2 Likely
Brimonidine/Timolol Combigan Allergan Glaucoma 142.5 2022 3 Likely
Olopatadine Hydrochloride Patanase Novartis Allergy 100.2 2023 2 Likely
Bimatoprost Lumigan Allergan Glaucoma 417 2027 6 Likely
Bimatoprost/Timolol Maleate Ganfort Allergan Glaucoma 185 NA NA Likely
Ophthal launches in US to boost Reg. market sales
Source: Company , Spark Capital Research
Actavis (Watson) deal to be key growth driver in both Sales and EBITDA
Revenue from Actavis deal to pick from FY16 onwards
We expect majority revenues from regulated markets would come from Actavis (Watson) deal. The company has a
partnership with Actavis for 23 ophthalmic products in the US market. The addressable market size of these drugs is
~US$ 3 bn. So far, it has filed 16ANDAs and received approval for 2 products gTrusopt and gCosopt, which were
launched in the US market in Q3FY15. We expect company to launch 3-4 products each year over FY15-FY17E.
Acquisition of Allergan by its partner Actavis should not have any immediate impact on the deal. There were four
products overlap which are to be commercialized only after 2020. Apart from this deal, it also filed seven more ANDAs
(oral products) on their own name and received approval for one product. We believe, US should be the key growth
driver going ahead. We expect sales from this deal to grow at a CAGR of >100% over FY15-17E
Deal structure: Indoco will develop and manufacture these products, while Watson (Actavis) will file for regulatory
approvals in US. Watson will also have the sole right for marketing them in the US. Another interesting component of
the deal is that as per the agreement Watson has committed to achieving a minimum 15% market share per product,
failing which Indoco has the right revoke the marketing right from Watson and also get ANDAs transferred to its name.
We believe this gives Indoco an upper hand when it comes to ownership rights of the products. Indoco and Watson
would share 50% of profits post-covering the manufacturing and marketing costs, respectively. The exact mark-up on
manufacturing costs for Indoco as well as the mark-down on marketing costs for Watson would vary from product to
product.
2,005 2,516
3,259
4,671
6,762
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Regulated markets projections
Page 75
Indoco Remedies (INDOCO) CMP
Rs.353
Target
Rs. 360
Rating
ADD Emerging markets
Sales from Semi regulated market to grow at a CAGR of 19% in FY15-17E
Source: Company, Spark Capital Research
Sales from Aspen & DSM deals to pick up slowly due to delay in approvals
Aspen deal:
Indoco also has a contract manufacturing deal with Aspen Pharma for about 30
countries (mainly Latin America). This deal is for ~50-55 products, where Indoco
will charge both development and manufacturing fees. So far, it has filed ~30
products across geographies and received approval for only 4 products.
Currently, company is facing delay in product approvals from South Africa,
Mexico and Venezuela. It generated sales of Rs. 200mn from this deal in FY15.
DSM deal
The contract manufacturing deal was signed by the company with DSM, Austria
in Jan’12 for APIs supply in Emerging Markets. Till date, the company has not
generated any revenue from this deal but intends to do so in future.
Source: Company, Spark Capital Research
Pick up in domestic APIs sales to drive overall API sales
Source: Company, Spark Capital Research
Unlike peers, majority R&D spend taken to BS rather than P&L
Source: Company, Spark Capital Research
460 518
582 656
744
0
100
200
300
400
500
600
700
800
900
1,000
FY13 FY14 FY15 FY16E FY17E
Rs. M
n
APIs
195
307
387
458
545
649
0
100
200
300
400
500
600
700
FY13 FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Semi-Regulated markets
2.5% 1.9% 1.9% 2.0% 2.0%
2.5% 3.0%
3.5% 3.5%
0.6% 0.4%
1.6% 2.0%
3.1% 3.2% 3.0% 3.0% 2.5%
3.1%
2.4%
3.5% 4.0%
5.1% 5.7%
6.0% 6.5%
6.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
% t
o s
ale
s
Charged to P & L Taken to BS Total
Page 76
Indoco Remedies (INDOCO) CMP
Rs.353
Target
Rs. 360
Rating
ADD Financial Summary
Change in product mix to enhance margins
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 24% over FY15-17E
Source: Company, Spark Capital Research
1-Yr forward PE Graph
Source: Bloomberg, Spark Capital Research
Return rations to improve going ahead
Source: Company, Spark Capital Research
7,326 8,570 10,390
13,134
16,779
16% 17%
21%
26% 28%
0%
5%
10%
15%
20%
25%
30%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
1,204 1,655
2,130 2,824
3,607
16%
19% 21%
22% 22%
10%
12%
14%
16%
18%
20%
22%
24%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margins (%)
15% 17%
19%
23% 25%
13% 15%
17%
19%
22%
5%
10%
15%
20%
25%
30%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
50
100
150
200
250
300
350
400
450
Jan-0
9
Apr-
09
Jul-
09
Oct-
09
Jan-1
0
Apr-
10
Jul-
10
Oct-
10
Jan-1
1
Apr-
11
Jul-
11
Oct-
11
Jan-1
2
Apr-
12
Jul-
12
Oct-
12
Jan-1
3
Apr-
13
Jul-
13
Oct-
13
Jan-1
4
Apr-
14
Jul-
14
Oct-
14
Jan-1
5
Apr-
15
12M fwd P/E
CM
P (
Rs.)
30x
5x
10x
15x
20x
25x
Page 77
Indoco Remedies (INDOCO) CMP
Rs.353
Target
Rs. 360
Rating
ADD Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 7,326 8,570 10,390 13,134 Revenue 16.1% 17.0% 21.2% 26.4%
EBITDA 1,204 1,655 2,130 2,824 EBITDA 29.1% 37.5% 28.7% 32.6%
Depreciation 309 471 558 618 Adjusted PAT 20.2% 24.3% 35.0% 48.0%
EBIT 895 1,184 1,572 2,206 Margin ratios
Other Income 18 17 16 15 EBITDA 16.4% 19.3% 20.5% 21.5%
Interest expense 103 106 190 154 Adjusted PAT 9.1% 9.7% 10.8% 12.6%
Exceptional items / Forex gain / (loss) 86 0 -312 -394 Performance ratios
PBT 809 1,096 1,398 2,068 RoE 15.3% 17.0% 19.3% 22.8%
PAT (after minority interest) 580 828 1,430 2,048 RoIC 13.2% 14.6% 16.8% 19.3%
Adjusted PAT (after MI) 666 828 1,118 1,654 Core RoIC 12.9% 14.4% 16.8% 16.5%
Balance Sheet Fixed asset turnover (x) 1.6 1.6 1.7 1.8
Net Worth 4,572 5,189 6,403 8,127 Total asset turnover (x) 1.0 1.1 1.1 1.1
Total debt 718 882 1,357 1,163 Financial stability ratios
Other liabilities and provisions 561 518 743 637 Net Debt to Equity (x) 0.1 0.1 0.1 0.0
Current liabilities & provisions 1,442 1,867 2,200 2,717 Current ratio (x) 2.5 2.4 2.7 2.9
Total Networth and liabilities 7,294 8,456 10,703 12,644 Inventory and debtor days 124 130 128 128
Gross Fixed assets 4,814 5,613 6,863 7,563 Working capital days 101 103 118 120
Net fixed assets 3,694 4,022 4,714 4,796 Interest cover (x) 0.1 0.1 0.1 0.1
Investments 2 2 2 2 Valuation metrics
Cash and bank balances 134 154 413 808 Fully Diluted Shares (mn) 92.2
Other Long term assets 1 3 3 3 Market cap (Rs.mn) 32,529
Current assets 3,463 4,275 5,570 7,034 Adjusted EPS (Rs.) 7.2 9.0 12.1 18.0
Total assets 7,294 8,456 10,702 12,644 P/E (x) 48.8 39.3 29.1 19.7
Cash Flows EV (Rs.mn) 33,113 33,257 33,473 32,884
Cash flows from Operations 708 913 1,025 1,718 EV/ EBITDA (x) 27.5 20.1 15.7 11.6
Cash flows from Investing -414 -801 -1,250 -700 BV/ share (Rs.) 49.6 56.3 69.5 88.2
Cash flows from Financing -301 -91 484 -624 Price to BV (x) 7.1 6.3 5.1 4.0
Page 78
IPCA Laboratories (IPCA) CMP
Rs. 644
Target
Rs. 526
Rating
SELL
Stock performance
1m 3m 12m
IPCA -1% -13% -22%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 32,818 8,106 5,508 43.6 14.8 10.5 31.4% 23.9%
FY15 31,418 5,291 2,509 19.9 32.4 16.7 12.0% 9.4%
FY16E 35,952 6,135 3,061 24.3 26.5 14.2 13.3% 10.0%
FY17E 41,680 8,365 4,741 37.6 17.1 10.2 18.4% 13.9%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg IPCA IN
Shares o/s 126mn
Market Cap Rs. 82bn
52-wk High-Low Rs. 899-591
3m Avg. Daily Vol Rs. 269mn
Index member BSE200
Latest shareholding (%)
Promoters 45.9
Institutions 33.0
Public 21.1
Initiating Coverage Ipca labs ran into trouble in Jun-2014 when the USFDA inspected its Ratlam facility and saw severe deviation from
cGMP guidelines. Since then three facilities of Ipca have been banned by USFDA for imports in the US markets.
Troubles further aggravated when taking cues from the USFDA, the WHO also intensified its regulatory scrutiny on the
plants and Ipca’s sales were severely impacted for the anti-malarial tender business (4Q15 sales of Rs 290mn versus a
run-rate of Rs 1,150-1,125mn couple of quarters back). Although one can only make guesses on the timelines of
resolution, we believe with three facilities under import alert, limited critical dependence on the plants from US
perspective (except HCQ APIs which have already been exempted) and from past track records of issue resolution
timelines (Ranbaxy / Wockhardt), clearance of facilities over the next 24 months is unlikely. Although the HCQs
supplies in the near term (2QFY16) may provide a fillip to the reported numbers, we believe growth on the same next
year would be a challenge as price erosion in prices because of re-entry of Ipca in HCQS remains a possibility.
Although one cannot argue that outlook on FY17E remains better than FY16E (because of low base primarily), we want
to highlight that Ipca’s US growth story has gone for a toss and Institutional generics business has growth constraints
on account of WHO programme funding limitations. Basically Ipca has become a domestic market play with high costs
associated for supplies resumption in exports over the next 2 years. We see the stock underperforming peers until
resolution of plants materialize. We initiate with a SELL rating and advocate a stay away approach on the stock.
HCQ supports not enough, US ANDA story gone for a toss: Although an increase in prices of HCQ post Ipca exit from the
market by peers, would help Ipca get short term fillip on numbers in FY16, we believe the whole Ipca ANDA filings and US
market presence story has gone for a toss with the import alerts. Ipca has 25 ANDAs pending for approval and we do not
foresee approvals coming through over the next 24 months. Also, Ipca’s filings stand to lose relevance with delay in launches,
plus the company may find it challenging to get back to pre-alert sales run-rate having lost market shares to others. We are
building in normalcy in sales resumption only in FY18E.
Institutional generics business also take a temporary knock: Ipca’s strong presence in anti-malarial market of Africa also
took a knock on account of heightened regulatory scrutiny by the WHO at the plants. We believe the same though temporary
has impacted margins, lowered sales and effectively led to increase in leverage on the company’s balance sheet. We are
building in Rs 4000mn and Rs 5000mn from this business in FY16E and FY17E. Growth on an high base remains a challenge
in this business for Ipca because of funding constraints for the anti-malaria programme.
India business remains the only saving grace: In light of the issues, effectively Ipca is reduced to a domestic market player
with significant costs associated with export markets. We continue to like Ipca’s domestic business and project a 16% sales
CAGR in this business over FY15-17E.
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Uncertainty continues: Underperformance on the anvil; Stay Away
Page 79
IPCA Laboratories (IPCA) CMP
Rs. 644
Target
Rs. 526
Rating
SELL
Manufacturing facilities
Source: Company, Spark Capital Research
Sales break up (FY15)
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
Business Overview
Locations Dosage Form Approvals/ Inspections
Athal -
Silvassa Tablets & Capsules
UK-MHRA, TGA-Australia, MCC-South Africa, HPB-Canada,
WHO-Geneva
Ratlam Tablets, Inj. & Ointments MCC-South Africa
Kandla Betalactum-Tablets UK MHRA, MCC-South Africa
Silvassa Tablets & Capsules UK MHRA, USFDA, TGA-Australia, HPB-Canada
Dehradun Tablets &
Ceph.Injectables WHO-GMP
Indore (SEZ) Tablets & Capsules UKMHRA, USFDA
Sikkim Tablets & Capsules GMP
Pithampur High Potency oral solids WHO-GMP, Invima Colombia
Locations Approvals/ Inspections
Ratlam USFDA, TGA-Australia, EDQM, PMDA-Japan, WHO-GMP
Indore WHO-GMP
Ankleshwar PMDA-Japan
Aurangabad WHO-GMP
Mahad GMP
FY11 FY12 FY13 FY14 FY15 FY16E FY17E CAGR
FY15-17E
Domestic formulations 6,964 7,534 8,781 9,694 11,287 13,093 15,188 16%
Export formulations 6,917 9,962 11,939 14,724 12,392 15,911 19,070 24%
Domestic APIs 1,443 1,439 1,433 1,645 1,783 1,872 1,966 5%
Exports APIs 3,335 4,058 5,232 6,002 5,137 4,679 5,060 -1%
Domestic formulations
37%
Export formulations
40%
Domestic APIs 6%
Exports APIs 17%
FO
RM
UL
AT
ION
S
AP
Is
Page 80
IPCA Laboratories (IPCA) CMP
Rs. 644
Target
Rs. 526
Rating
SELL Lack of capacity despite healthy pipeline for US market
cGMPs issues remains a major concerns
Source: Company, Spark Capital Research
Place Type of
facility Timeline What happened Current Status Our View
Ratlam API
18-Jul-14
USFDA inspected facility from July 14-18th
Issued 483 letter with six observations
Two of them were related to data integrity
So far Ipca has send five updates to USFDA
Requested USFDA for a meeting to give presentation on the
remedial measures and current status update
Facility was inspected by EMEA, TGA-Australia, WHO & Berlin
Agency in Q4FY15 and received approval from EMEA, TGA *
Berlin
Waiting WHO approval, which is expected in next one month
Consultant is preparing a comprehensive compliance plan and
will be submitting to company by end of June
Disappointed with management’s lack of focus on
compliance
Ipca will take minimum 2-3 quarters for implementing
remedial measures suggested by consultant
Post that, it will request FDA for an inspection
Looking at the past track record FDA, we don’t
expect clearance for the facility in next 2 years
Don’t see any compelling reason for FDA to prioritize
reviews for Ipca
24-Jul-14 Voluntarily stopped shipments to the US
19-Sep-14 Health Canada issued Import alert
21-Jan-15
FDA issued Import alert
But excluded five molecules: Hydroxychloroquine Sulfate
(HCQS), Sulfamethoxazole/ Trimethoprim, Ondansetron
and Propranolol HCl
Piparia Formulations
19-Dec-14 Received 483 with five observations from USFDA Ipca has re-started manufacturing HCQS and Propranolol HCl
General corrective measures started
Facility specific remedial measures will start only after
communication from FDA
Started supplying HCQS in the US from Q4FY15
We expect US to get a bump up from HCQS &
Propranolol HCL in 2Q16
Looking at the past track record FDA, we don’t
expect clearance for the facility in next 2 years
24-Mar-14 USFDA issued import alert
Import alert excludes HCQS & Propranolol HCl
Indore
SEZ Formulations
6-Nov-14 Received 483 with six observations from USFDA Started corrective measures at the facility
So far company has send 3 updates to USFDA on remedial
measures
Looking at the past track record FDA, we don’t
expect clearance for the facility in next 2 years 24-Mar-14 USFDA issued import alert
Pipeline though healthy becomes irrelevant
Source: Company, Spark Capital Research
API Brand # players Filings
Chloroquine Phosphate Aralen 4 Approved
Hydrochlorothiazide Microzide 12 Approved
HCTZ Losartan Potassium Hyzaar 13 Approved
Losartan Potassium Cozaar 17 Approved
Ondansetron Hydrochloride Zofran 11 Approved
Tramadol Hydrochloride Ultram 15 Approved
Warfarin Sodium Coumadin 10 Approved
Etodolac Lodine/ Lodine XL 4 Likely
Mesalamine Asacol/ Asasol HD Likely
Fluconazole Diflucan >12 Likely
Valsartan Diovan/ Diovan HCT >11 Likely
Ramp up in R&D on developing 505 b(2) drugs - Project hangs in uncertainty
Source: Company, Spark Capital Research
Developing lower strength of Clopidogreal
Ipca is developing 3 molecules to file in 505 b
(2) route
Clopidogrel is close to filing while remaining
molecules are at nascent stage
Clopidogrel is currently available in 75mg and
300 mg.
Ipca is working on reducing dosage strength by
90%, thereby reducing side effects
The development of the drug is on hold as
company prioritising to resolve the issues of
manufacturing facilities
Ipca is scouting for a partner, we feel it might be
a tall ask under current scheme of things
780
1007
1232
1621
3.3
3.6 3.8
5.2
3.0
3.5
4.0
4.5
5.0
5.5
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY12 FY13 FY14 FY15
Rs. M
n
R&D cost R&D cost % sales
Page 81
IPCA Laboratories (IPCA) CMP
Rs. 644
Target
Rs. 526
Rating
SELL
Artesunate injection launch to support growth in institutional business - Funding side a challenge
Source: Company, Spark Capital Research
2,996
3,911 4,370
2,599
4,000
5,000
0
1,000
2,000
3,000
4,000
5,000
6,000
FY
12
FY
13
FY
14
FY
15
FY
16E
FY
17E
Rs. M
n
India business – the only saving grace
Diversified product basket in India
Source: Company, Spark Capital Research
Relatively lower number of launches among peers
Source: Company, Spark Capital Research
Focus on key brands
Source: Company, Spark Capital Research
Rs. Mn FY15 FY14 Growth
(%)
% of India
Sales
Zerodol SP 652 476 37% 5.4%
Zerodol P 589 486 21% 4.9%
HCQS 574 431 33% 4.8%
Larinate 429 343 25% 3.6%
Rapither-AB 399 420 -5% 3.3%
Lariago 371 369 1% 3.1%
Glycinorm M 320 273 17% 2.7%
Folitrax 292 231 26% 2.4%
Lumerax 269 227 19% 2.2%
Azibact 267 220 22% 2.2%
Huge demand for malaria products globally
As per UN malaria report, annual funding for malaria
control and elimination in 2013 was US$ 2.7 bn, which
is significantly below the requirement of US$ 5.1 bn
African region accounted 72% of total spending and ~
25% of African spent was on treatment
The procurement of the drugs is being done through
tenders by institutions like The Global fund, UN
donation etc.
Artemisinin based combination (ACTs) is the most
preferred treatment in Africa (~US$ 250 mn)
In our view, market can be doubled if the funding
constraints are addressed appropriately
Source: Company, Spark Capital Research
IPCA participates in anti-malarial tenders floated by
AMFM program, US donations and others
FY15 sales was impacted due to cGMP issues at Ratlam
API facility
WHO has recently inspected the facility and acceptance
letter is expected to come in next one month
Institutional business is expected to pick up from Q2FY16
Artesunate Injection
Artesunate injection can be an important growth driver for
the company
The injection has relatively less side effects compare to
present treatments
Ipca is setting up a manufacturing facility for injection
Expected to launch the injection in FY17E
NSAID 35%
CVS & Anti-
diabetics 24%
Anti-Malarials
14%
Anti-Bacterial
6%
Gastro-Intestinal
5%
Neuro Psychiatry
3%
Cough preparatio
ns 4%
Dermatology 4%
Others 5%
5
8
25
5 6
13
0
5
10
15
20
25
30
FY09 FY10 FY11 FY12 FY13 FY14
No
. o
f p
rod
uc
ts
India product launches
Page 82
IPCA Laboratories (IPCA) CMP
Rs. 644
Target
Rs. 526
Rating
SELL Financials
EBITDA to grow at a CAGR 25% over FY15-17E on a low base
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 15% over FY15-FY17E
Source: Company, Spark Capital Research
1 Yr forward PE graph
Source: Bloomberg, Spark Capital Research
Return ratios: On recovery path
Source: Company, Spark Capital Research
32,818
31,418 35,952
41,680
51,614
17%
-4%
14% 16%
24%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0
10,000
20,000
30,000
40,000
50,000
60,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
8,106
5,291 6,135
8,365
10,886 25%
17% 17%
20%
21%
0%
5%
10%
15%
20%
25%
30%
0
2,000
4,000
6,000
8,000
10,000
12,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margin
31%
12% 13%
18% 22%
24%
9% 10%
14% 17%
0%
5%
10%
15%
20%
25%
30%
35%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
200
400
600
800
1,000
1,200
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Oct-
11
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
Jan-1
4
Apr-
14
Jul-14
Oct-
14
Jan-1
5
Apr-
15
12M fwd P/E
CM
P (
Rs.)
20x
5x 8x 11x 14x 17x
Page 83
IPCA Laboratories (IPCA) CMP
Rs. 644
Target
Rs. 526
Rating
SELL Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 32,818 31,418 35,952 41,680 Revenue 16.7% -4.3% 14.4% 15.9%
EBITDA 8,106 5,291 6,135 8,365 EBITDA 30.1% -34.7% 16.0% 36.3%
Depreciation 1,031 1,796 2,315 2,335 Adjusted PAT 42.4% -54.4% 22.0% 54.9%
EBIT 7,074 3,495 3,820 6,030 Margin ratios
Other Income 223 358 573 573 EBITDA 24.7% 16.8% 17.1% 20.1%
Interest expense 269 284 359 359 Adjusted PAT 16.8% 8.0% 8.5% 11.4%
Exceptional items / Forex gain / (loss) 722 -33 0 0 Performance ratios
PBT 7,028 3,569 4,034 6,244 RoE 31.4% 12.0% 13.3% 18.4%
PAT (after minority interest) 4,785 2,542 3,061 4,741 RoIC 23.9% 9.4% 10.0% 13.9%
Adjusted PAT (after MI) 5,508 2,509 3,061 4,741 Core RoIC 23.3% 8.8% 9.0% 17.6%
Balance Sheet Fixed asset turnover (x) 1.8 1.3 1.2 1.3
Net Worth 19,597 22,085 23,955 27,515 Total asset turnover (x) 1.1 0.9 0.9 1.0
Total debt 4,379 8,286 8,286 8,286 Financial stability ratios
Other liabilities and provisions 1,633 1,964 1,964 1,964 Net Debt to Equity (x) 0.2 0.3 0.3 0.2
Current liabilities & provisions 6,494 5,790 7,225 8,376 Current ratio (x) 2.6 3.0 2.8 3.0
Total Networth and liabilities 32,103 38,124 41,430 46,140 Inventory and debtor days 144 149 145 145
Gross Fixed assets 20,303 27,589 30,089 32,589 Working capital days 105 118 110 111
Net fixed assets 14,841 20,332 20,517 20,682 Interest cover (x) 0.0 0.1 0.1 0.1
Investments 90 162 218 218 Valuation metrics
Cash and bank balances 764 1,248 2,260 3,826 Fully Diluted Shares (mn) 126.2
Other Long term assets 436 446 349 352 Market cap (Rs.mn) 81,273
Current assets 15,972 15,936 18,086 21,062 Adjusted EPS (Rs.) 43.6 19.9 24.3 37.6
Total assets 32,103 38,124 41,430 46,140 P/E (x) 14.8 32.4 26.5 17.1
Cash Flows EV (Rs.mn) 84,888 88,311 87,298 85,733
Cash flows from Operations 5,436 3,720 4,661 5,250 EV/ EBITDA (x) 10.5 16.7 14.2 10.2
Cash flows from Investing -3,879 -7,369 -2,459 -2,504 BV/ share (Rs.) 155.3 175.0 189.8 218.0
Cash flows from Financing -1,377 4,133 -1,191 -1,181 Price to BV (x) 4.1 3.7 3.4 3.0
Page 84
Lupin (LPC) CMP
Rs. 1,772
Target
Rs. 2,052
Rating
BUY
Stock performance
1m 3m 12m
LPC -2% -9% 74%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial Summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 1,12,866 30,028 18,364 41.0 43.3 26.3 30.3% 25.4%
FY15 1,27,700 36,196 24,032 53.5 33.1 21.5 30.4% 27.1%
FY16E 1,49,423 42,569 28,326 63.0 28.1 18.1 28.2% 25.9%
FY17E 1,83,160 55,099 36,894 82.1 21.6 13.7 29.0% 27.0%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg LPC IN
Shares o/s 450mn
Market Cap Rs. 774bn
52-wk High-Low Rs. 2,115-968
3m Avg. Daily Vol Rs. 3,695mn
Index member BSE100
Latest shareholding (%)
Promoters 46.6
Institutions 43.4
Public 10.0
Initiating Coverage Lupin (LPC) is in the process of transforming itself from a generic company to a speciality company. The company is
building a niche product pipeline through enhancing R&D capabilities towards complex therapies areas like
ophthalmic (7-8 products), Dermatology (10-15 products), Injectables (15-20 products), controlled substance (11
products), Respiratory and Biosimilars. We believe the meaningful contribution from these niche products would start
from FY17E onwards. The near-term growth would be driven by product launches in the US and Indian market. LPC is
currently awaiting approvals for 99 ANDAs, which includes 34 FTFs (15 sole FTFs). We expect the company to launch
15-20 products in FY16 followed by ramp up in approvals in FY17 and FY18 in line with improving approval timelines by
USFDA. In domestic market, the company has grown higher than industry over the last 5 years thanks to chronic
therapies. We expect growth momentum to continue in this market. Overall, we expect revenues, EBITDA and net profit
to grow at a CAGR of 20%, 23% and 24%, respectively over FY15-17E. Despite short term concerns like delay in
product approvals, price erosion in US branded business basket, we believe company’s long term prospects remain
intact and robust. We initiate coverage with a BUY rating with TP Rs. 2052 based on 25xFY17E EPS of Rs. 82.1.
Product approvals to drive growth: In the past two years, the US growth has been slowing down (16% in FY14 & 11% in
FY15 in $ terms) despite robust generic pipeline mainly because of slow product approvals, price erosion in existing products
and genericization of Antara brand. We expect generic business to pick up from 2HFY16 driven by new launches. So far,
Lupin has filed 210 ANDAs, received approval for 111 products and launched 77 products. Of 99 pending approvals, it holds
‘first-to-file’ status on 34 products (15 sole FTFs). We expect the company to launch 15-30 products per annum over the next
three years. The key product launches (near-term) are gGlumetza (sole FTF), gWelchol, gRenvela, gNexium and gLoestrin
24Fe. The branded business is expected to be under pressure due to genericization of Suprax suspension. However, we
expect business to improve from FY17 on the back of sales pick up from Antara (low strength), Inspira chamber (recently
launched) and Suprax drops (plans to launch in next 3-4 months). We also believe LPC is actively scouting for brand
acquisition as it has no plans to reduce filed force count despite genericization of leading franchises. We expect US generic
business to grow at a CAGR 22%in FY15-17E.
Continue to outpace industry growth in India: Lupin is ranked 7th in domestic formulation with market share of 3.4%. Over
the last decade, it has transformed from acute therapy focus (Anti-TB) company to chronic focus company (chronic:acute:-
66:34 in FY15 v/s 31:69 in FY06). The domestic sales grew at a CAGR of 17% over FY11-15, which is higher than industry
growth of 11% due to focus on chronic therapies and improvement in field force productivity (Rs. 3.9 mn in FY11 to Rs. 5.4
mn in FY15). We expect growth momentum to continue. We expect domestic sales to grow at a CAGR of 18% over FY15-
17E.
Near term outlook tepid, but long term as robust as ever
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 85
Lupin (LPC) CMP
Rs. 1,772
Target
Rs. 2,052
Rating
BUY Business Overview
R&D spend stepped up
Source: Company, Spark Capital Research
Geographical sales breakup (FY15)
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
(Rs. Mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E CAGR
India 15,509 19,059 23,643 24,796 29,680 35,022 41,388 18%
US 20,297 24,363 37,695 49,015 56,593 65,321 84,861 22%
EU 1,831 1,975 2,357 2,791 3,262 3,804 4,260 14%
Japan 6,211 8,608 13,040 12,954 13,239 14,067 15,636 9%
South Africa 1,788 2,554 3,210 3,800 4,218 5,472 7,113 30%
Rest of World 3,534 2,843 3,609 5,175 6,333 9,176 11,844 37%
API 8,589 8,491 9,498 11,178 11,941 12,538 13,165 5%
India 24%
US 45%
EU 3%
Japan 10%
South Africa 3%
Rest of World 6%
API 9%
4,660 5,228
6,875
9,294
10,988
8.0%
7.4%
7.1%
8.2%
8.7%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
0
2,000
4,000
6,000
8,000
10,000
12,000
FY11 FY12 FY13 FY14 FY15
Rs. M
n
R&D cost R&D cost % revenues
Page 86
Lupin (LPC) CMP
Rs. 1,772
Target
Rs. 2,052
Rating
BUY US remains key growth driver
Developing niche pipeline for future
Source: Company, Spark Capital Research
Strong visibility in US pipeline
Source: Company, Bloomberg, USFDA, Spark Capital
Research; * US$ Mn
Robust pipeline….
Source: Company, Spark Capital Research
…. to drive growth in generics
Source: Company, Spark Capital Research
API Product Expected Brand
Value*
Known
players
Colesevelam Welchol
suspension 1QFY16 30 4
Esomeprazole Nexium 2QFY16 6,000 8
Memantine Namenda 2QFY16 2,000 <10
Norethindrone/
Ethinyl Estradiol /
Ferrous Fumarate
Generess Fe 3QFY16 115 4
Sevelamer Renagel 2Q/
3QFY16 200 4
Colesevelam Welchol tabs 3Q/
4QFY16 300 4
Lansoprazole ODT Prevacid ODT 4QFY16 400 5
Metformin ER Glumetza 4QFY16 140 1
Norgestimate/
Estradiol
OrthoTricycle
n Lo
3Q/
4QFY16 400 8
Norethindrone and
Ethinyl Estradiol and
Ferrous Fumarate
Loestrin 24
Fe
On
Approval 300 5
Bromfenac Prolensa 1QFY17 30 2
Darunavir Prezista 1Q/
3QFY17 800 4
Doxycycline Oracea 2QFY17 300 2
Quetiapine ER Seroquel XR 3QFY17 800 6
Armodafinil Nuvigil 3QFY17 400 6
Lapatinib ditosylate Tykerb 2QFY18 100 1
Tenofovir Disporoxil Viread 2QFY18 550 6
Emtricitabine +
tenofovir Truvada 3QFY18 2,000 6
Mesalamine ER Apriso 1QFY19 80 3
Pregabalin Lyrica 3QFY19 2,200
Area Update on development efforts Area of focus US market
size
Desired portfolio
by 2020
NDDDs 10 NCEs across therapies in development
Biosimilars 10 under development; Japan trials started Generic 8.4 Beyond 2020
Respiratory Developments of Nasal sprays, MDIs and DPIs Brand &
Generic 15
2-3 sprays, at least
1 MDI & 1 DPI
Injectables Developing a basket of general & Complex Gx Generic 16.6
15-20 products &
1st product from
Nanomi
Dermatology Filings commenced; FDA inspected facility Brand &
Generic 2.8 10-15 products
Ophthalmology Products launched in US Generic 1.8 7-8 products
Controlled substance First filing made; 11 products in pipeline Brand &
Generic 7.4 11 products
OC's 30 filings and 15 products in market Generic 2.3 30 products
40 48
64
78
99
111
87
100 109
98 93
99
0
20
40
60
80
100
120
FY10 FY11 FY12 FY13 FY14 FY15
No
. o
f A
ND
As
Approved Pending approvals
803 892
1,052
1,367
1,638
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY14 FY15 FY16E FY17E FY18E
US
$ M
n
US sales
Page 87
Lupin (LPC) CMP
Rs. 1,772
Target
Rs. 2,052
Rating
BUY US branded business: Near term pain, long term gain
Celon tie up for respiratory device
Signed an agreement with Celon for co-development
of Advair DPI
Celon device is similar to the innovator product and
already launched in Poland
Intends to develop and commercialise the inhaler for
US
The device prototype has a clearance from USFDA
Celon has small manufacturing facility 0.2mn units
per month and plans to expands capacity to 1mn
units per month
Teva, Mylan, Sandoz, Cipla and Adamis are other
players developing this DPI
We believe Lupin can launch gAdvair even before
Cipla in the US market
Source: Company, Spark Capital Research
Robust growth on a low base
Source: Company, Spark Capital Research
US branded business: near term pain
Targeting paediatric and high prescribing primary
care physicians
150+ filed force in US market
In-licensed Alinia and Locoid in the last two years
FY16 sales would be impacted as Aurobindo has
recently launched gSuprax suspension
Suprax suspension accounts 60% of Suprax sales
Recently launched Antara (lower strength) and
Inspira chamber and plans to launch Suprax drops
Actively scouting for brand acquisitions
Source: Company, Spark Capital Research
Pickup up in recent launches to drive growth
Source: Company, Spark Capital Research
145
80 83
64
84
98
0
20
40
60
80
100
120
140
160
FY13 FY14 FY15 FY16E FY17E FY18E
US
$ M
n
Branded
Antara genericized
Suprax
genericized
5,175 6,333
9,176
11,844
15,297
0
3,000
6,000
9,000
12,000
15,000
18,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
RoW markets
Foray into Brazil
Foray into the high growth Brazilan market with
Medquimica acquisition
2nd acquisition in LatAm region after Laboratories
Grin, Mexico acquisition in FY14
Brazil is 6th largest market in India with ~4% global
sales and Industry has doubled from 2009-13
Pharmaceutical industry estimated BRAL 58 bn
Medquimica has a presence in branded generics,
generic-generic and OTC products
It has over 550 employees
Annual sales of BRL 94 Mn (US$ 31Mn)
Source: Company, Spark Capital Research
RoW: Value driver…
South Africa:
Remained focused on CNS & OTC segment
Consolidate branded presence through new
product launches and in-licensing
Planning to enter hospitals segment through a
speciality injectable basket
Australia:
Presence in both Rx and OTC segment
Planning to build niche product portfolio in
Ophthalmic and respiratory segment
Philippines:
Launched Oncology division
Aiming to attain leadership in therapies CNS, GI,
diabetics and Oncology
Page 88
Lupin (LPC) CMP
Rs. 1,772
Target
Rs. 2,052
Rating
BUY Steady growth in India and Japan
New product introductions to drive growth...
Source: Company, Spark Capital Research
Recovery started in I’rom business
Source: Company, Spark Capital Research
India business - Continues to outpace Industry growth….
Source: Company, Spark Capital Research
India - Improving chronic presence….
Source: Company, Spark Capital Research
Recovery started in I’rom business
Patents of CVS drugs worth of ~$10
bn set to expire in next 5-6 years,
which benefits Lupin as Kyowa has
significant presence in CVS
It is also planning to build Oncology
and specialty injectable product
basket
Backward integration should
improve margins going ahead
Currency remains a concern
Planning to increase specialty
product portfolio; including products
in new therapies like insulin and
dermatology
To enhance penetration in Tier II
cities and rural areas
Step up in-licensing launches from
global players
All these initiatives to improve sales
force productivity
69% 56%
37% 36% 34%
31% 44%
63% 64% 66%
0%
20%
40%
60%
80%
100%
FY06 FY08 FY13 FY14 FY15
% o
f In
dia
n s
ale
s
Acute Chronic
24,796 29,680
35,022
41,388
48,987
0
10,000
20,000
30,000
40,000
50,000
60,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
India
12 9 16 18 19
29
9 5
-11 -11 -4
-28
-4 2
-26
6 5 3 10
2
13
22
0 5
-40
-30
-20
-10
0
10
20
30
40
Q1F
Y14
Q2F
Y14
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
Gro
wth
(%
)
Kyowa i'rom Total Japan
Business impacted
due to restructuring Discontinued tender
business 21,399
23,443
26,051
28,955
32,190
15,000
19,000
23,000
27,000
31,000
35,000
FY14 FY15 FY16E FY17E FY18E
JP
Y. M
n
Page 89
Lupin (LPC) CMP
Rs. 1,772
Target
Rs. 2,052
Rating
BUY Financials
Return ratios remains strong
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 19% in FY15-18E
Source: Company, Spark Capital Research
EBITDA to grow at a CAGR of 22.7% in FY15-18E
Source: Company, Spark Capital Research
1Yr forward P/E graph
Source: Bloomberg, Spark Capital Research
112,8
66
127,7
00
149,4
23
183,1
60
217,2
20
17%
13%
17%
23%
19%
0%
5%
10%
15%
20%
25%
0
50,000
100,000
150,000
200,000
250,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
30,0
28
36,1
96
42,5
69
55,0
99
67,4
43
27%
28% 28%
30%
31%
24.0%
25.0%
26.0%
27.0%
28.0%
29.0%
30.0%
31.0%
32.0%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margin (%)
30% 30%
28% 29%
28%
25%
27%
26%
27% 26%
20%
22%
24%
26%
28%
30%
32%
FY14 FY15 FY16E FY17E FY18E
RoNW RoIC
0
500
1,000
1,500
2,000
2,500
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Oct-
11
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
Jan-1
4
Apr-
14
Jul-14
Oct-
14
Jan-1
5
Apr-
15
12M fwd P/E
CM
P (
Rs.)
32x
12x
16x
20x 24x
28x
Page 90
Lupin (LPC) CMP
Rs. 1,772
Target
Rs. 2,052
Rating
BUY Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 1,12,866 1,27,700 1,49,423 1,83,160 Revenue 17.1% 13.1% 17.0% 22.6%
EBITDA 30,028 36,196 42,569 55,099 EBITDA 32.3% 20.5% 17.6% 29.4%
Depreciation 2,610 4,347 5,058 5,688 Adjusted PAT 32.2% 30.9% 17.9% 30.2%
EBIT 27,418 31,849 37,511 49,411 Margin ratios
Other Income 1,165 2,398 2,500 2,500 EBITDA 26.6% 28.3% 28.5% 30.1%
Interest expense 267 98 98 98 Adjusted PAT 16.3% 18.8% 19.0% 20.1%
Exceptional items / Forex gain / (loss) 0 0 0 0 Performance ratios
PBT 28,317 34,148 39,913 51,813 RoE 30.3% 30.4% 28.2% 29.0%
PAT (after minority interest) 18,364 24,032 28,326 36,894 RoIC 25.4% 27.1% 25.9% 27.0%
Adjusted PAT (after MI) 18,364 24,032 28,326 36,894 Core RoIC 26.4% 29.9% 22.3% 21.0%
Balance Sheet Fixed asset turnover (x) 2.5 2.4 2.3 2.4
Net Worth 69,316 88,741 1,11,808 1,42,392 Total asset turnover (x) 1.2 1.1 1.0 1.1
Total debt 5,533 4,710 4,710 4,710 Financial stability ratios
Other liabilities and provisions 4,270 4,085 4,085 4,085 Net Debt to Equity (x) (0.1) (0.2) (0.2) (0.3)
Current liabilities & provisions 22,272 33,601 34,276 40,745 Current ratio (x) 2.9 2.4 2.9 3.2
Total Networth and liabilities 1,02,060 1,31,378 1,55,531 1,92,995 Inventory and debtor days 149 147 152 152
Gross Fixed assets 49,469 56,758 72,258 81,258 Working capital days 106 75 86 89
Net fixed assets 30,018 32,961 43,402 46,714 Interest cover (x) 0.0 0.0 0.0 0.0
Investments 21 25 0 0 Valuation metrics
Cash and bank balances 9,739 21,372 29,747 46,089 Fully Diluted Shares (mn) 449.5
Other long term assets 7,287 17,326 12,851 14,851 Market cap (Rs.mn) 7,94,522
Current assets 54,995 59,693 69,530 85,340 Adjusted EPS (Rs.) 41.0 53.5 63.0 82.1
Total assets 1,02,060 1,31,377 1,55,531 1,92,995 P/E (x) 43.3 33.1 28.1 21.6
Cash Flows EV (Rs.mn) 7,90,316 7,77,859 7,69,485 7,53,142
Cash flows from Operations 20,039 35,423 24,633 33,653 EV/ EBITDA (x) 26.3 21.5 18.1 13.7
Cash flows from Investing -8,585 -17,333 -11,000 -11,000 BV/ share (Rs.) 154.2 197.4 248.7 316.8
Cash flows from Financing -8,571 -6,456 -5,259 -6,310 Price to BV (x) 11.5 9.0 7.1 5.6
Page 91
Neuland Laboratories CMP
Rs. 350
Target
Rs. 611
Rating
BUY
Stock performance
1m 3m 12m
NLL 0% -9% 20%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 4,691 731 268 34.7 10.1 6.1 24.0% 14.7%
FY15 4,699 674 159 17.8 19.6 6.6 11.2% 9.9%
FY16E 5,702 884 282 31.4 11.1 5.9 17.3% 13.1%
FY17E 7,065 1,159 456 50.9 6.9 4.9 24.4% 14.5%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg NLL IN
Shares o/s 9mn
Market Cap Rs. 3bn
52-wk High-Low Rs. 547-258
3m Avg. Daily Vol Rs. 11mn
Index member BSE200
Latest shareholding (%)
Promoters 51.7
Institutions 2.5
Public 45.7
Initiating Coverage Neuland Laboratories (NLL) is a small-sized Pharma company with a presence in the active pharmaceutical ingredients
(APIs) and contract manufacturing service (custom synthesis, CS) businesses. We believe NLL has adopted a very
interesting route of playing the niche and complex generics patent expiry story, but through the API route. At one end
where APIs have lower margins, formulations have constraints on market shares of individual companies. However, in
APIs companies could go up to 75% market share in even genericized molecules with cost and process advantage. We
believe this is where NLL is positioned to benefit significantly going ahead. It is also scaling-up its CS business and
has a contract with Mitsubishi APIC and an API supply tie up with two Japanese based innovator companies for their
NCE products. Over the years, NLL has built a strong pipeline, which includes 48 DMFs filings with USFDA and 378
DMFs with EU. Our analysis on API pipeline reveals several interesting opportunities including Propofol, Salmeterol,
Entacapone, Paliperidone and so on over next 3-4 years. NLL also has displayed sound regulatory practices having
cleared inspection by USFDA, COFEPRIS and KFDA in 2014 on one of its plants. We believe monetisation of niche API
pipeline coupled with ramp up in CS business should boost sales and profitability to a new level going ahead. We
expect revenues, EBITDA and net profit to grow at CAGR 23%, 31% and 69%, respectively over FY15-17E. Currently,
NLL is trading at 60-70% discount to industry leader Divis. However, we expect valuation discount to narrow down as
all growth drivers are in place. We initiate NLL with a BUY rating with a TP of Rs 611, 12x FY17E EPS of Rs 50.9.
API- Niche pipeline in place; close to reaping benefits: NLL derives ~85% of total sales from API business. Over the
years, NLL has built a strong pipeline (75 products), which includes 48 DMFs filings with USFDA, 378 DMFs with European
Union, 23 with Health Canada and 84 in RoW markets. Of 75 products, the company has commercialised 42 products till date
and plans to launch remaining 23 products over next 3-4 years. Our analysis on API pipeline reveals several interesting
opportunities including Propofol, Salmeterol, entacapone, paliperidone and so on. NLL believes they have competitive
advantage in terms of production methodology in most of their filings to help them garner strong market share. In our
assumption, the current pipeline can generate peak revenue of $70 mn by FY18E, subject to timely product approvals.
Custom synthesis (CS):- a game changer: CS currently contributes ~15% of total sales, scaled up from 3% in FY12.
Management has guided contribution from CS business to reach 30% of total sales by FY18E. NLL has an intermediates
supply tie up with APIC and it has setup a dedicated manufacturing facility at Unit II for the same. The supplies have just
begun and we expect meaningful revenues to start only from FY17E. The revenue potential from this deal can be Rs. 1.0-1.5
bn over next 2-3 years. NLL also has an API supply agreements with two Japanese innovator companies for their NCE
products. As these supplies are for branded products, the company gets relatively higher margins to other contracts. We
expect sales from CS to grow at a CAGR of 57% over FY15-17E.
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Solid API pipeline about to unfold – Multi- bagger in the making
Page 92
Neuland Laboratories CMP
Rs. 350
Target
Rs. 611
Rating
BUY
Strengthened balance sheet
Source: Company, Spark Capital Research
Change in business mix improved profitability
Source: Company, Spark Capital Research
Healthy product pipeline
Source: Company, Spark Capital Research
Business Overview
Diversified geographic presence
Source: Company, Spark Capital Research
Lower product & client concentration
Source: Company, Spark Capital Research
Regulatory No. Of DMFS
USFDA 48
Canada 23
EU 378
EDQM (COS) 19
Japan 5
Korea 9
RoW 84
4,502 4,640 4,691 4,699
11%
13%
16%
14%
8%
9%
10%
11%
12%
13%
14%
15%
16%
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY12 FY13 FY14 FY15
Rs. M
n
Revenues EBITDA Margins (%)
292
592
743
285
87
53 142
92
250 368
561 662
329
6
-137
-94
-206
-126
1.3
2.0
2.6
3.4 3.2
2.9
2.1
1.5 1.1
-2
-1
0
1
2
3
4
-400
-200
0
200
400
600
800
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Rs. M
n
Capex Inc/ (Dec) Debt D/E
India 29%
US 15%
Europe 44%
Japan 4%
RoW 8%
15
47
43
0
5
10
15
20
25
30
35
40
45
50
Largest Product Top 5 products Top 5 clients
% o
f sale
s
Page 93
Neuland Laboratories CMP
Rs. 350
Target
Rs. 611
Rating
BUY Change in product mix to be key growth driver
Current pipeline
Source: Company, Spark Capital Research
DMF filings are in place
Source: Company, Spark Capital Research
Target pipeline
Source: Company, Spark Capital Research
Proportion of Custom Synthesis & High value API to improve further
Source: Company, Spark Capital Research
APIC tie up – a game changer in CS business
Custom synthesis (CS) contributes ~15% to sales,
company aims to improve contribution to 30% by FY18E
Experience in technology transfer from process research
to commercial scale
NLL has two manufacturing sites consisting of 11
production blocks including one block for peptides
Expertise in manufacturing deuterium exchanged APIs
Tied up supply arrangement with Japanese company API
corporation (APIC), a subsidiary of Mitsubishi Chemicals
in FY13. This partnership translate into long-term
business gains
NLL commissioned dedicated manufacturing facility for
APIC at Unit 2 in FY14
Received first set of revenues from APIC in Q4FY15
Source: Company, Spark Capital Research
8
4
6
0
1
2
3
4
5
6
7
8
9
>20 market share >40 market share > Rs. 200 Mn
No
. p
rod
uc
ts
FY14
20
12
17
0
5
10
15
20
25
>20 market share >40 market share > Rs. 200 Mn
No
. p
rod
uc
ts
FY18E
2015
APIs (High volume)
70%
APIs (High value) 15%
Custom Synthesis
15%
2018E
APIs (High volume)
50%
APIs (High value) 20%
Custom Synthesis
30%
2
4 4
3
6
3
1
2
0
1
2
3
4
5
6
7
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
No
. o
f fi
lin
gs
Page 94
Neuland Laboratories CMP
Rs. 350
Target
Rs. 611
Rating
BUY
Riche pipeline of products
Source: Company, Spark Capital Research
Product pipeline in place to boost API growth…
Brand API Therapy Status DMF Filing
date
Sales
$mn
DMF from
India/China
Total
filers
Probable
launch
Estimated
sales $Mn
Abilify Aripiprazole Antipsychotic Development 24-Jun-09 5,200 25 33 2015 0.9
Alimta Pemetrexed Disodium Oncology 22-Dec-11 1,200 13 15 2017 1.6
Aloxi Palonosetron Hydrochloride Anti-emetic 11-Dec-07 478 11 15 2015 0.3
Aricept Donepezil Hydrochloride Anti-Alzheimer Commercial 11-Dec-07 2,400 23 27 NA NA
Atrovent / Atrovent HFA Ipratropium Bromide Antiarrhythmic Commercial 6-Nov-00 220 2 5 NA NA
Comtan Entacapone Antiparkinsonian Commercial 11-Apr-08 60 12 17 NA NA
Diprivan Propofol Anesthetic Commercial 13-Aug-13 120 2 7 2015 1.3
Eliquis Apixaban Anti-Coagulant Early Development To be filed 115 1 1 2019 1.0
Emend Fosaprepitant Anti-emetic Early Development To be filed 419 3 3 2019 4.4
Exjade Deferasirox Chelating agent Development 26-Jan-12 240 7 10 2017 1.3
Invega Sustenna Paliperidone Palmitate Anti-Psychotic Development 2-Jul-12 525 4 5 2019 6.9
Lexapro Escitalopram Oxalate Antidepressant Commercial 7-Aug-06 1,800 18 18 NA
Onglyza Saxagliptin Base/Hydrochloride Anti-Diabetic Early Development To be filed 558 9 11 2021 0.4
Pradaxa Dabigatran Etexilate mesilate Antithrombotic Development To be filed 859 8 10 2018 0.9
Rapaflo Silodosin BPH alpha-adrenergic
antagonists Early Development To be filed 146 5 5 2016 0.4
Requip Ropinirole base Antiparkinsonian Development 14-Sep-12 300 1 1 NA
Requip Ropinirole Hydrochloride Antiparkinsonian Commercial 10-Jul-06 300 11 13 NA
Serevent/Advair Salmeterol Xinafoate Bronchodilator Commercial 22-Jul-09 5,500 10 12 2017 19.3
Spiriva Tiotropium Bromide Bronchodilator Development 6-Feb-09 3,027 1 5 2021 15.9
Vigamox / Avelox Moxifloxacin Hydrochloride Antibacterial Development 19-Sep-05 277 / 204 12 13 NA
Xarelto Rivaroxaban Anti-Coagulant Early Development To be filed 850 5 8 2020 1.5
Zetia Ezetimibe Antilipemic Development 1-Dec-11 1350 9 10 2016 5.7
Zyprexa Olanzapine Anti-Psychotic Commercial 24-Mar-06 2,000 20 23 NA
Zyvox Linezolid Antibacterial Development 29-Dec-10 430 12 17 2015 0.1
Page 95
Neuland Laboratories CMP
Rs. 350
Target
Rs. 611
Rating
BUY Financials
Return ratios to improve….
Source: Company, Spark Capital Research
Revenues to grow at a CAGR of 23% in FY15-17E
Source: Company, Spark Capital Research
EBITDA to grow at a CAGR of 31% in FY15-18E
Source: Company, Spark Capital Research
1Yr forward P/E graph
Source: Bloomberg, Spark Capital Research
4,691 4,699
5,702
7,065
7,928
1.1% 0.2%
21.3% 23.9%
12.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Gr. (%)
731 674
884
1,159
1,340
15.6%
14.3%
15.5% 16.4%
16.9%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
0
200
400
600
800
1,000
1,200
1,400
1,600
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margins (%)
24.0%
11.2%
17.3%
24.4% 23.8%
14.7%
9.9%
13.1% 14.5% 13.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
FY14 FY15 FY16E FY17E FY18E
RoE (%) RoIC (%)
0
100
200
300
400
500
600
700
800
Mar-
10
Jun-1
0
Sep
-10
Dec-1
0
Mar-
11
Jun-1
1
Sep
-11
Dec-1
1
Mar-
12
Jun-1
2
Sep
-12
Dec-1
2
Mar-
13
Jun-1
3
Sep
-13
Dec-1
3
Mar-
14
Jun-1
4
Sep
-14
Dec-1
4
Mar-
15
12M fwd P/E
CM
P (
Rs.)
19x
4x
7x
10x
13x
16x
Page 96
Neuland Laboratories CMP
Rs. 350
Target
Rs. 611
Rating
BUY Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 4,691 4,699 5,702 7,065 Revenue 1.1% 0.2% 21.3% 23.9%
EBITDA 731 674 884 1,159 EBITDA 18.5% -7.8% 31.1% 31.1%
Depreciation 149 153 175 208 Adjusted PAT 93.4% -40.5% 76.5% 61.8%
EBIT 582 521 709 950 Margin ratios
Other Income 0 0 0 0 EBITDA 15.6% 14.3% 15.5% 16.4%
Interest expense 236 274 318 318 Adjusted PAT 5.7% 3.4% 4.9% 6.4%
Exceptional items / Forex gain / (loss) 0 0 0 0 Performance ratios
PBT 346 247 391 633 RoE 24.0% 11.2% 17.3% 24.4%
PAT (after minority interest) 268 159 282 456 RoIC 14.7% 9.9% 13.1% 14.5%
Adjusted PAT (after MI) 268 159 282 456 Core RoIC 15.0% 10.1% 13.3% 13.6%
Balance Sheet Fixed asset turnover (x) 1.8 1.7 1.9 2.0
Net Worth 1,240 1,614 1,649 2,079 Total asset turnover (x) 1.0 1.0 1.1 1.2
Total debt 1,735 1,790 2,540 3,140 Financial stability ratios
Other liabilities and provisions 185 215 0 0 Net Debt to Equity (x) 1.4 1.1 1.5 1.4
Current liabilities & provisions 1,525 1,493 917 1,129 Current ratio (x) 1.9 2.3 3.5 3.6
Total Networth and liabilities 4,686 5,115 5,110 6,351 Inventory and debtor days 163 188 145 145
Gross Fixed assets 2,632 2,777 3,177 3,777 Working capital days 101 100 75 75
Net fixed assets 1,654 1,645 1,870 2,262 Interest cover (x) 0.4 0.5 0.4 0.3
Investments 74 74 74 74 Valuation metrics
Cash and bank balances 7 70 23 163 Fully Diluted Shares (mn) 9.0
Other long term assets 75 0 0 0 Market cap (Rs.mn) 2,704
Current assets 2,877 3,326 3,143 3,853 Adjusted EPS (Rs.) 34.7 17.8 31.4 50.9
Total assets 4,687 5,115 5,110 6,351 P/E (x) 10.1 19.6 11.1 6.9
Cash Flows EV (Rs.mn) 4,432 4,425 5,222 5,682
Cash flows from Operations 161 -167 63 166 EV/ EBITDA (x) 6.1 6.6 5.9 4.9
Cash flows from Investing -85 -70 -400 -600 BV/ share (Rs.) 138.5 180.3 184.2 232.2
Cash flows from Financing -81 301 289 574 Price to BV (x) 2.5 1.9 1.9 1.5
Page 97
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD
Stock performance
1m 3m 12m
SUNP -14% -21% 29%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 1,60,804 71,956 57,218 23.8 34.2 26.2 33.9% 26.2%
FY15 2,74,334 86,093 53,241 22.1 36.8 22.1 23.5% 17.7%
FY16E 2,97,196 1,03,858 64,529 26.8 30.4 17.4 21.8% 16.8%
FY17E 3,56,169 1,33,433 86,727 36.0 22.6 13.0 23.9% 18.7%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg SUNP IN
Shares o/s 2,406mn
Market Cap Rs. 1,958bn
52-wk High-Low Rs. 1,201-616
3m Avg. Daily Vol Rs. 8,645mn
Index member BSE100
Latest shareholding (%)
Promoters 63.6
Institutions 24.5
Public 11.9
Initiating Coverage Sun Pharma has been the best Indian Pharma company over the past many years both in terms of financial delivery
and in terms of stock returns. However, Sun Pharma’s recent quarter (4Q15) performance has come as a negative
surprise to the street as the company delivered numbers significantly below estimates. The numbers also indicated
that resolution of Halol issues are not fully over. We believe Halol remains the most important multi-dosage facility for
Sun Pharma. We believe key drugs like gDoxil and gGleevec are filed from this facility. Although one is taking some
comfort from the approval of Elepsia from Halol facility for SPARC, we remain cautious and keep a close watch on
incremental approvals to ascertain whether the issue is really over. Although at this stage it remains anybody’s guess
when the facility will be cleared, but one cannot deny that any adverse outcome of USFDA regulatory scrutiny could
drastically impact financial performance and stock returns. We hence advise caution on Sun Pharma. We are building
in a resolution of Halol issues from 2HFY16 (assuming pick-up in US sales) and hence the downside risk remains to
our numbers. We however also believe that Sun Pharma could materially benefit from Ranbaxy’s integration in the long
run. Overall, we expect revenues, EBITDA and net profit to grow at a CAGR of 19%, 23% and 23%, respectively over
FY15-17E. Despite short term concerns we believe company’s long term prospects remain intact and robust. We
initiate coverage with an ADD rating with a TP Rs. 901 based on 25xFY17E EPS of Rs. 36.
Ranbaxy integration the key ahead: Sun Pharma acquired Ranbaxy in 2014. The company has guided to achieve benefits
of $250mn in synergies over the next 3 years. We believe the guidance is conservative as a large portion of the benefits can
accrue from just reduction in remediation measures of the plants over time and also from some employee costs related
rationalisation. We believe Sun could possibly benefit significantly from sales synergies whereas the guidance factors most of
the benefits on the costs front itself. We are positive that given Sun’s track record on acquisitions, it would emerge as a larger
and a much stronger company over the next 3 years
gGleevec to keep US sales strong in FY17: We believe Sun has 180 day exclusivity on gGleevec (not certain). However,
we believe gGleevec might turn out to be a low competition opportunity even post the 180 day exclusivity. Limited known
ANDA filings and most of them in 2014 indicates Sun Pharma could have an extended period of low competition with
authorized generic, innovator and Apotex in the market at best. There remains an out of court settlement possibility for other
filers which could risk our assumptions. We expect US sales to be subdued in FY16E on account of Halol issues and base
price erosion, but on this base FY17E is expected to be a very strong year with 28% growth (including gGleevec).
ROW and emerging markets presence an opportunity for Sun Pharma: Sun Pharma could see huge benefits of cross
selling its products in markets where it gets a new and direct entry thanks to Ranbaxy’s presence. We foresee high teens
growth in most of the markets ex-US for Sun+Ranbaxy in FY17E.
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Halol resolution to decide near term stock direction – Long term steady
Page 98
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD
5th largest generic company globally
Source: Company, Spark Capital Research
Sales break up - FY15
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
Business Overview
Rs. Mn FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E
CAGR
India 23,801 29,154 29,657 36,918 67,166 74,689 83,348 11%
US 22,531 34,716 61,538 97,844 137,196 140,870 179,664 14%
Emerging markets 0 0 0 10,308 37,326 43,869 51,403 17%
RoW 6,452 11,124 15,271 8,777 23,320 23,613 26,435
APIs 5,212 6,147 7,549 8,010 9,910 13,976 15,806
Others 70 31 73 138 792 0 0
India 24.4%
US 49.8%
Emerging markets 13.5%
RoW 8.5%
APIs 3.6%
Others 0.3% 9.8
8.5
6.4 6.4
5.1
3 2.6 2.4 2.3 2 1.8 1.7
0
2
4
6
8
10
12
Te
va
Sandoz
Acta
vis
Myla
n
Sun P
harm
a
Aspen
Hospira
Fre
seniu
s
Sanofi
Lupin
DR
L
Cip
la
US
$ B
n
Page 99
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD Halol facility remediation critical for US growth
Remediation efforts at Halol impacts US sales
Source: Company, Spark Capital Research
Halol facility resolution critical
US sales ex-Taro & Ranbaxy declined >US$ 50 mn
sequentially due to disruption in supplies from Halol facility
The facility is currently undergoing remediation measure to
address 483 observations
USFDA issued 483 with 23 observations (10 for the
injectable unit, 4 for the oral solid unit and remaining for the
quality control lab)
There were no data integrity issues but majority issues were
procedural, which may take longer time to resolve
Any adverse outcome should significantly impact US sales
as facility contributes ~50% of US (ex-taro) sales and 25% of
consolidated EBITDA (in our view)
Key products exported from the facility are gDoxil,
gCymbalta. gAstelin, gImitrex auto-injector and gCardizem.
gGleevec is also filed from this facility
We have assumed supplies to pick up from Q2FY16
Source: Company , Spark Capital Research
Gleevec – A key near term opportunity
Sun Pharma has settled patent litigation over generic
Gleevec with Novartis in March 2014
Annual sales of the drug is ~ US$ 2 bn in US
Gleevec is used to treat chronic myeloid leukemia
As per settlement, the company will launch generic on 1st
February 2016
Sun holds 180 days marketing exclusivity
Low competition product as there are only 3 more known
players (Apotex, Dr Reddy’s& Breckenridge)
Sun has filed ANDA from Halol facility; Site transfer
underway
We expect sales of US$ 67 mn and US$ 300 mn in FY16E &
FY17E, respectively
Source: Company , Spark Capital Research
Spike in R&D cost on MK-3222 development
Source: Company , Spark Capital Research
Tildrakizumab sales should be promising
Sun has in-licensed anti-psoriasis biologic molecule
tildrakizumab (IL-23, MK-3222) from Merck last year
Molecule is in Phase III clinical trials
This would be first novel drug from an Indian company to
launch in regulated markets once approved
Sun paid US$ 80 mn upfront to license the product and
management indicated for a total spend of US$ 300 mn to
get product to the market
Psoriasis market in US is estimated ~US$ 6.8 bn in 2014,
which includes sales from biologics of ~US$ 4.3 bn
Sun Pharma has not finalised any marketing strategy for the
drug
We are not modelling any revenues from this product
Source: Company, Spark Capital Research
Tildrakizumab competitive landscape
Source: Company, Spark Capital Research
243
291
253
204
149
0
50
100
150
200
250
300
350
Q4F
Y14P
Q1F
Y15P
Q2F
Y15P
Q3F
Y15P
Q4F
Y15P
US
$ M
n
US sales ex Taro & Ranbaxy
2898
2936
2437
2919
3651
4430
6.8% 7.3% 6.2%
6.1% 8.5%
12.3%
0%
2%
4%
6%
8%
10%
12%
14%
0
1,000
2,000
3,000
4,000
5,000
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15*
Rs. M
n
R&D cost R&D % sales
Type
Brand/
Molecule
Name
Ingredient Status Innovator
IL 12/23 Stelara Ustekinumab Launched J & J
IL 17 AIN 457 Secukinumab Launched Novartis
IL 17 AMG 827 Brodalumab Phase III AstraZenec
a/Amgen
IL 17 LY2439821 Lexkinzumab Phase II Eli Lilly
IL 23 MK-3222 Tildrakizumab Phase III Sun/ Merck
IL 23 BI 655066 Phase II Boehringer
Ingelheim
IL 23 CNTO1959 Guselkumab Phase II J & J
Page 100
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD India: Productivity and market share improvement holds key
Leader in India Pharma market (IPM)
Ranked No. 1 with market share of 8.9%
Holds 12.8% market share in chronic therapies
while 7.2% market share in acute therapies
Specializes in technically complex products and
presence across therapies
Has a diversified product basket as top 10
brands contribute only ~17% of India sales
More than 9000 medical representatives
covering over 6 lakh doctors
Source: Company, Spark Capital Research
Highest market share in IPM
Source: Spark Capital Research
Significant presence in chronic therapies
Source: Spark Capital Research; sales in Rs. Mn
Diversified product basket
Source: Spark Capital Research; sales in Rs. Mn
Productivity improvement – first priority
Source: Company, Spark Capital Research; * including
Ranbaxy
New launches + MS expansion to drive growth
Source: Company, Spark Capital Research
8.9
6.2
5 4.2
3.6 3.5 3.4 3.0 3.0 2.6
0
2
4
6
8
10
Sun
Abott
Cip
la
Cadila
Mankin
d
Gla
xo
Lupin
Pfizer
Macle
ods
Inta
s
(%)
Market share (%)
Therapy Sun % India sales IPM MS (%)
CNS 13,580 18% 60,380 22%
Cardiac 13,070 17% 1,07,080 12%
Anti-Infectives 9,190 12% 1,37,640 7%
Gastro Intestinal 8,860 12% 99,380 9%
Anti Diabetic 6,450 8% 66,92, 10%
Pain 5,600 7% 60,380 9%
Vitamins 3,540 5% 77,980 5%
Derma 3,300 4% 49,550 7%
Gynaecological 3,180 4% 43,470 7%
Respiratory 2,950 4% 68,340 4%
Ophthal 1,930 3% 12,570 15%
Brand Therapy FY15 % to sales FY14 Gr. (%)
Volini Pain 2,121 3% 2,239 -5
Revital Vitamins 1,596 2% 2,655 -40
Gemer Anti Diabetic 1,318 2% 1,148 15
Rosuvas Cardiac 1,290 2% 9,38 38
Pantocid GI 1,257 2% 1,097 15
Susten Gyne 1,202 2% 1,202 0
Istamet Anti Diabetic 1,165 2% 1,165 0
Levipil Neuro 1,159 2% 873 33
Mox Anti-
Infectives 1,067 1% 951 12
Storvas Cardiac 1,034 1% 906 14
7.1
9.2
11.1 10.1
11
7.4
0
2
4
6
8
10
12
FY10 FY11 FY12 FY13 FY14 FY15*
Rs. M
n
Sales per representative Industry average
Rs. 5.5 Mn
36,918
67,166 74,689
83,348 93,178
0
20,000
40,000
60,000
80,000
100,000
120,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
India
Page 101
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD Taro: Pipeline in place to compensate price erosion, if any
Sharp jump in Taro margins on price hikes
Source: Company, Spark Capital Research
Healthy pipeline to compensate price erosion
Source: Company , Spark Capital Research
New launches to drive Taro sales
Source: Company , Spark Capital Research
Expanded footprints through M&As in the past
Source: Company , Spark Capital Research
Scouting for acquisitions
Sun’s inorganic strategy is acquiring either sub-
optimally managed or financially distressed
companies
Strong track record of turning around the acquired
businesses eg: Taro, URL
Actively scouting for acquisitions as Ranbaxy
acquisition was an all stock deal and huge cash on the
books remain (net cash US$ 1 bn)
In our view, Sun Pharma is capable of doing
acquisition > US$ 9 bn
High possibility of acquiring companies which have
presence in Biosimilars and NDDS pipeline
Management bandwidth can be a key concern
Source: Company, Spark Capital Research;
Capable of funding acquisitions > US$ 9bn
Source: Company, Spark Capital Research; *Assuming 10% equity
dilution, **Debt raising capability was calculated on assumption i) Debt to EBITDA of
2.5x and ii) Acquired business EBITDA margins are 20% of companies EBITDA
411
543
671 759
871
59%
67%
74% 76% 79%
24%
44% 49%
57% 61%
20%
30%
40%
50%
60%
70%
80%
90%
0
100
200
300
400
500
600
700
800
900
1,000
FY11 FY12 FY13 FY14 FY15
US
$ M
n
Sales GPM (%) EBITDA Margins (%)
759 871
1,024 1,121
1,227
0
200
400
600
800
1,000
1,200
1,400
FY14 FY15 FY16E FY17E FY18E
US
$ M
n
4
9 11 12
16
21
27
35
0
5
10
15
20
25
30
35
40
FY12 FY13 FY14 FY15
No
. o
f A
ND
As
ANDA filed Pending for Approval
Year M & As/ In-licensing Areas of enhancement
2015 Ranbaxy Merger Improved global presence
2015 GSK’s Opiates Business
(Proposed) Controlled substances
2014 In-licensed MK-3222 from
Merck NBE
2014 Pharmalucence Sterile injectable capacity in
the US
2013 URL’s generic business US product portfolio (107
products)
2012 DUSA Pharma, Inc. Branded dermatology products
2010 Taro Pharma Dermatology & Topical
Products in the US
0.9
3.6
4.1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Net Cash Equity Debt
US
$ B
n
Page 102
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD
…. to drive US sales growth
Source: Company, Spark Capital Research
Clear visibility in near term launches; price erosion in existing basket a concern
Near term launches
Source: Company, Bloomberg, USFDA, Spark Capital
Research
API Product Expected Brand
Value
Known
players
Memantine Namenda 2QFY16 2,000 <10
Dexmedetomidine Precedex Q3FY16 150 4
Aripiprazole Abilify Q3FY16 7,800 8
Carvedilol CR Coreg CR Q3FY16 300 2
Esomeprazole Nexium 2HFY16 6,000 8
Lansoprazole ODT Prevacid ODT Q4FY16 400 5
Imatinib Gleevec Q4FY16 2,000 4
Metformin ER Glumetza 4QFY16 140 1
Desvenlafaxine Pristiq FY16 600 3
Atomoxetine Strattera FY17 384 6
Rosuvastatin Crestor Q1FY17 3,100 10
Sitagliptin
phosphate Januvia Q1FY18 2,800 4
Dronedarone HCL Multaq 2018 320 4
Pregabalin Lyrica 3QFY19 2,200 4
Bivalirudin Angiomax FY20 450 6
Lacosamide Vimpat FY22 353 8
Sirolimus Rapamune Unknown 200 4
Oxymorphone Opana ER Unknown 300 5
Febuxostat Uloric Unknown 300 8
Ranbaxy synergies of US$ 250 mn by FY18E
appears conservative
We believe management’s guidance on synergies of US$ 250
mn by FY18E is conservative as there are many areas for
improvement including
Operating cost rationalisation and control of high overheads
in Ranbaxy
Cross selling in various emerging markets
Filing more ANDAs using Ranbaxy APIs
Capacity rationalisation: Site transfer of ANDAs from US
(Ohm facility) to other manufacturing facilities
Rationalisation of field force in India (9000+) will improve
productivity and market share in India
Resolution of consent decree saves costs (US$ 50mn)
Source: Company, Spark Capital Research
Cross selling products to boost EM sales
Source: Company, Spark Capital Research
Strong product pipeline….
Source: Company, Spark Capital Research
1,620
2,244 2,272
2,898 3,063
0
500
1,000
1,500
2,000
2,500
3,000
3,500
FY14 FY15 FY16E FY17E FY18E
US
$ M
n
10,308
37,326 43,869
51,403
60,612
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Emerging markets
225 250
311 344
438
152 147 138 134 159
0
50
100
150
200
250
300
350
400
450
500
FY11 FY12 FY13 FY14 FY15
No
. o
f p
rod
uc
ts
ANDAs approved Awaiting approval
Page 103
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD Financial summary
EBITDA margins to pick up from FY16E onwards
Source: Company, Spark Capital Research; FY15 includes Ranbaxy numbers
Revenues to grow at a CAGR of 14% over FY15-17E
Source: Company, Spark Capital Research; FY15 includes Ranbaxy numbers
1-Yr forward PE graph
Source: Bloomberg, Spark Capital Research
Ranbaxy acquisition impacts return ratios in short term
Source: Company, Spark Capital Research; FY15 includes Ranbaxy numbers
160,804
274,334 297,196
356,169 390,273
42%
71%
8%
20%
10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
71,9
56
86,0
93
103,8
58
133,4
33
152,4
94
44.7%
31.4% 34.9%
37.5% 39.1%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA margins (%)
33.9%
23.5% 21.8%
23.9% 22.6%
26.2%
17.7% 16.8% 18.7% 18.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
200
400
600
800
1,000
1,200
1,400
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Oct-
11
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
Jan-1
4
Apr-
14
Jul-14
Oct-
14
Jan-1
5
Apr-
15
12M fwd P/E
CM
P (
Rs.)
32x
12x 16x
20x 24x 28x
Page 104
Sun Pharmaceutical Industries (SUN) CMP
Rs. 814
Target
Rs. 901
Rating
ADD Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 1,60,804 2,74,334 2,97,196 3,56,169 Revenue 42.3% 70.6% 8.3% 19.8%
EBITDA 71,956 86,093 1,03,858 1,33,433 EBITDA 47.0% 19.6% 20.6% 28.5%
Depreciation 4,094 12,948 11,102 12,963 Adjusted PAT 60.1% -7.0% 21.2% 34.4%
EBIT 67,862 73,145 92,756 1,20,470 Margin ratios
Other Income 5,081 4,521 5,986 6,584 EBITDA 44.7% 31.4% 34.9% 37.5%
Interest expense 442 5,790 8,951 7,959 Adjusted PAT 35.6% 19.4% 21.7% 24.4%
Exceptional items / Forex gain / (loss) 25,174 7,835 0 0 Performance ratios
PBT 72,501 71,876 89,791 1,19,096 RoE 33.9% 23.5% 21.8% 23.9%
PAT (after minority interest) 32,044 45,406 64,529 86,727 RoIC 26.2% 17.7% 16.8% 18.7%
Adjusted PAT (after MI) 57,218 53,241 64,529 86,727 Core RoIC 43.6% 29.8% 30.4% 33.0%
Balance Sheet Fixed asset turnover (x) 1.9 1.9 1.5 1.7
Net Worth 1,88,005 2,65,250 3,26,210 3,98,862 Total asset turnover (x) 0.6 0.7 0.6 0.6
Total debt 24,890 75,963 65,507 60,056 Financial stability ratios
Other liabilities and provisions 28,865 28,172 30,628 28,079 Net Debt to Equity (x) (0.4) (0.2) (0.5) (0.6)
Current liabilities & provisions 31,858 92,382 1,26,468 1,54,313 Current ratio (x) 6.2 3.4 3.3 3.4
Total Networth and liabilities 2,92,830 4,90,279 5,88,408 6,93,025 Inventory and debtor days 121 146 145 148
Gross Fixed assets 92,956 1,94,870 2,02,870 2,10,870 Working capital days 156 126 93 90
Net fixed assets 58,244 1,47,211 1,44,109 1,39,146 Interest cover (x) 0.0 0.1 0.1 0.1
Investments 7,876 5,989 5,989 5,989 Valuation metrics
Cash and bank balances 95,886 1,31,155 2,17,001 2,86,936 Fully Diluted Shares (mn) 2,071.2
Loans & advances and other assets 30,214 19,055 19,055 19,055 Market cap (Rs.mn) 19,58,647
Current assets 1,00,610 1,86,870 2,02,254 2,41,899 Adjusted EPS (Rs.) 23.8 22.1 26.8 36.0
Total assets 2,92,831 4,90,279 5,88,407 6,93,025 P/E (x) 34.2 36.8 30.4 22.6
Cash Flows EV (Rs.mn) 18,87,651 19,03,455 18,07,153 17,31,767
Cash flows from Operations 16,946 42,107 1,05,416 1,00,010 EV/ EBITDA (x) 26.2 22.1 17.4 13.0
Cash flows from Investing -18,009 -88,869 -8,000 -8,000 BV/ share (Rs.) 90.8 128.1 157.5 192.6
Cash flows from Financing 43,309 82,031 -11,569 -22,075 Price to BV (x) 9.0 6.4 5.2 4.2
Page 105
Unichem Laboratories (ULL) CMP
Rs. 180
Target
Rs. 228
Rating
BUY
Stock performance
1m 3m 12m
ULL -10% -18% -11%
Sensex -2% -9% 3%
BSEHC -6% -10% 43%
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE (%) ROIC (%)
FY14 11,334 1,778 1,112 12.3 14.6 9.0 14.4% 13.0%
FY15 12,018 1,013 754 8.3 21.6 15.6 9.0% 8.4%
FY16E 13,554 1,381 809 8.9 20.1 11.8 9.0% 8.5%
FY17E 16,037 2,009 1,290 14.3 12.6 7.7 13.4% 12.7%
Date 15 June 2015
Market Data
SENSEX 26425
Nifty 7983
Bloomberg UL IN
Shares o/s 91mn
Market Cap Rs. 16bn
52-wk High-Low Rs. 268-173
3m Avg. Daily Vol Rs. 24mn
Index member BSE200
Latest shareholding (%)
Promoters 50.1
Institutions 18.1
Public 31.7
Initiating Coverage Unichem laboratories (ULL) is among the leading players in the CVS and CNS therapies in India. Over the last five
years, ULL performance was impacted due to restructuring in distribution model, NLEM impact and lower growth in
power brands in India and slower product approvals in the US. We expect India business to turnaround from FY16 as
company has taken various initiatives such as re-aligning field force and product basket, improving its reach to tier II to
tier IV cities and launching new products in fast growing Musculoskeletal, Gynaecology & dermatology therapies. On
US front, we believe product approvals should accelerate from FY16 (~40% of pending ANDAs age >3 years) and expect
6-7 product launches including key products like gNamenda ($1.7bn) and gAbilify ($7.8 bn) over the next two years. We
believe that the worst is behind in terms of performance and ULL is gearing up for a strong growth recovery in the near
term. We expect revenues, EBITDA and net profit to grow at a CAGR of 16%, 41%, and 31%, respectively over FY15-17E.
We initiate coverage on ULL with Buy rating with TP of Rs. 228, 16xFY17E EPS of Rs. 14.3.
Initiatives are in place to bring back growth in India: ULL has underperformed vis-a-vis Industry (UL: 3.1% vs IPM: 11%) in
last five years due to i) restructuring of distribution model and inventory rationalisation, ii) muted growth in power brands
(Sartans contributes 30% of India sales, up only 1% CAGR), and iii) addition of new products to price control list. India
business contributes ~55% of sales. To bring back the growth in Indian business, UL has re-aligned its product basket into
‘growth portfolio’ and ‘mature portfolio’ segments. It is focusing on growth in ‘growth portfolio’ segment by launching new
products in fast growing therapies like Musculoskeletal, Gynaecology and dermatology. On the other hand, it is also arresting
de-growth in ‘mature portfolio’ by enhancing its reach to GPs in tier III/IV cities. We believe these initiatives would bring back
growth in the India business. We expect domestic sales to grow at a CAGR of 9% over FY15-17E.
US business to lead exports growth: In the last 4-5 years, ULL’s focus has been on enhancing its presence in exports,
especially to regulated markets like US and EU. Currently, export formulations contribute ~37% of sales. We believe US to be
the key growth driver in exports as Unichem has a healthy drug pipeline. It has filed 34 ANDAs (primarily CVS & CNS),
received approvals for 17 products (including two tentative approvals) and launched 14 products. It is also developing 15
ANDAs including few complex generics. ULL is facing significant delay in product approvals as it has received only 2
approvals in FY14 & FY15. Despite that, the US sales have doubled (US$ 24.9mn in FY15 vs.US$ 12.4 mn in FY14) and
EBTIDA turned into green in FY15. This was primarily due to increase in the market share of existing products. We believe
product approvals should accelerate from FY16 as 5-6 products out of the 17 pending ANDAs are having filing age > 36
months. We expect Unichem to launch 6-7 products in next two years including key products like gNamenda and gAbilify. We
expect US sales to grow at a CAGR of 37% on a low base over FY15-FY17E and EBITDA margins jump sharply on account
of operating leverage
ASHISH RATHI [email protected] +91 22 4228 8158
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
On the cusp of a recovery; Strong growth visible next 2 years
Page 106
Unichem Laboratories (ULL) CMP
Rs. 180
Target
Rs. 228
Rating
BUY
Manufacturing facilities
Source: Company, Spark Capital Research
Sales Break up FY15
Source: Company, Spark Capital Research
Sales forecast (Consolidated)
Source: Company, Spark Capital Research
Business Overview
Plant Cater to Regulatory approvals
Formulation
Baddi India UK MHRA, ANVISA & WHO
Ghaziabad Regulated & Developing markets USFDA, ANVISA, TGA, UKMHRA &
WHO
Goa Regulated & Developing markets USFDA, ANVISA, TGA, UKMHRA &
WHO
Sikkim India
Ireland Packing facility Irish Medical Board & Kazakhstan
regulatory
API
Roha Across geographies USFDA, EDQM, WHO, PMDA, EU
GMP, KFDA, ISO, OHSGS & M-FDA
Pithampur Across geographies USFDA, EU GMP, WHO, Cofepris
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY15-17E
CAGR
Formulations
India 5,758 5,333 6,349 6,551 6,510 7,095 7,805 9%
Exports 1,118 1,619 2,536 2,552 3,128 4,038 5,289 30%
APIs
India 220 209 219 269 232 208 188
Exports 483 778 865 919 900 821 728
India formulations
61%
Export formualtions
29%
India APIs2%
Export APIs8%
Page 107
Unichem Laboratories (ULL) CMP
Rs. 180
Target
Rs. 228
Rating
BUY
India sales to grow at a CAGR of 9% in FY15-17E
Source: Company, Spark Capital Research
Muted sales growth over five years…
Source: Company, Spark Capital Research
Strategy in place for domestic turnaround
Focus to improve MS in sartan…
Source: Company, Spark Capital Research; Sales in Rs. Mn
Rs. Mn FY11 FY12 FY13 FY14 FY15
Losartan & Combo
IPM 5,280 5,360 5,530 5,240 5,100
ULL 1,635 1,599 1,757 1,677 1,663
MS (%) 31% 30% 32% 32% 33%
Telmisartan & Combo
IPM 4,860 7,150 9,400 11,820 14,490
ULL 295 367 421 464 500
MS (%) 6% 5% 4% 4% 3%
Olmesartan & Combo
IPM 1,850 2,890 3,950 4,860 5,840
ULL 168 246 271 313 321
MS (%) 9% 9% 7% 6% 5%
Restructuring largely over…
Source: Company, Spark Capital Research
Productivity to improve going ahead
Source: Company, Spark Capital Research
Strategy in place
Re-aligned product basket into mature portfolio
(~40% domestic sales) and growth portfolio
(~60% of sales)
Also re-aligned MR strength to improve
productivity
Expanding portfolio in high growth therapies
like Musculoskeletal, Gynecology and
dermatology
Looking to expand in non-urban areas, mainly
GPs in Tier III/IV
Increasing focus towards OTC segment
5,758 5,333
6,349 6,551 6,510
9%
-7%
19%
3%
-1%
-10%
-5%
0%
5%
10%
15%
20%
25%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY11 FY12 FY13 FY14 FY15
Rs. M
n
India Gr (%)
100% 95%
57% 45%
20%
0% 5%
43% 55%
80%
0%
20%
40%
60%
80%
100%
FY11 FY12 FY13 FY14 FY15
% t
o In
dia
n s
ale
s
Distributors CNF
1700
1800
2100
2736
2675
2825
2975
3125
3.4
3.0 3.0
2.4 2.4 2.5 2.6
2.8
1.5
2.0
2.5
3.0
3.5
0
500
1,000
1,500
2,000
2,500
3,000
3,500
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16E
FY
17E
FY
18E
Rs. M
n
Nu
mb
er
of
MR
s
Field force productivity
6,510 7,095
7,805 8,742
0
2,000
4,000
6,000
8,000
10,000
FY15 FY16E FY17E FY18E
Rs. M
n
India
Page 108
Unichem Laboratories (ULL) CMP
Rs. 180
Target
Rs. 228
Rating
BUY
9
11
15
17 17
8
14 14 14
17
0
2
4
6
8
10
12
14
16
18
FY11 FY12 FY13 FY14 FY15
No
. o
f A
ND
As
Approved Pending approval
Key product launches in the next two years
Source: USFDA, Company, Spark Capital Research
Product launches in US hold the key
API Therapy Brand Market
size $ mn
Players in
market
Memantine HCl CNS Namenda 1700 No
Irbesartan CVS Avapro 50 17
Irbesartan HCTZ CVS Avalide 20 14
Aripiprazole CNS Abilify 7800 5
Tiagabine HCl CNS Gabitril 20 2
Zolmitriptan CNS Zomig 30 8
Zolmitriptan ODT CNS Zomig-ZMT 10 4
Tolterodine Tartarate CNS Detrol 15 4
Donepezil HCl CNS Aricept 300 26
Donepezil HCl ODT CNS Aricept ODT 3 5
Timely product approvals can double US sales
Source: Company, Spark Capital Research
US to boost overall exports
Source: Company, Spark Capital Research
Niche Generics UK disappoints again in FY15
Source: Company, Spark Capital Research
Bunching up of approvals expected
Source: Company, Spark Capital Research
Healthy pipeline in place…
Entered US market in FY10
Launched 14 products in the US through its own
front end
Till date 34 ANDAs have been filed; majority are
CVS and CNS drugs. Received approval for 17
drugs
In the process of developing 15 ANDAs including a
few complex products
US sales doubled in FY15 mainly due to expansion
in market shares
Expanding capacity in Goa facility to cater to
increased sales
12.3
24.9
34.1
46.7
64.0
7%
13%
15%
18%
22%
0%
5%
10%
15%
20%
25%
0
10
20
30
40
50
60
70
FY14 FY15 FY16E FY17E FY18E
US
$ M
n
US formulations % revenues
3,128
4,038
5,289
6,295
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY15 FY16E FY17E FY18E
Rs. M
n
Exports
10.0 10.3 10.8 10.5 9.3
-0.7 -0.2
0.1 0.2
-0.5 -2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
FY11 FY12 FY13 FY14 FY15
GB
P. M
n
Sales Profitability
Page 109
Unichem Laboratories (ULL) CMP
Rs. 180
Target
Rs. 228
Rating
BUY Financial Summary
Margins to pick up on domestic recovery
Source: Company, Spark Capital Research
New launches US and recovery in domestic business to drive growth
Source: Company, Spark Capital Research
1-Yr forward PE
Source: Bloomberg, Spark Capital Research
Return ratios to move northwards
Source: Company, Spark Capital Research
1,778
1,013
1,381
2,009
2,356 15.7%
8.4%
10.2%
12.5%
13.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
500
1,000
1,500
2,000
2,500
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
EBITDA EBITDA Margins (%)
11,334 12,018 13,554
16,037
18,133
5% 6% 13%
18%
13%
0%
4%
8%
12%
16%
20%
0
4,000
8,000
12,000
16,000
20,000
FY14 FY15 FY16E FY17E FY18E
Rs. M
n
Revenues Growth (%)
14.4%
9.0% 9.0%
13.4% 14.7%
13.0%
8.4% 8.5%
12.7% 14.0%
0%
4%
8%
12%
16%
FY14 FY15 FY16E FY17E FY18E
RoNW (%) RoIC (%)
0
50
100
150
200
250
300
350
400
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Oct-
11
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
Jan-1
4
Apr-
14
Jul-14
Oct-
14
Jan-1
5
Apr-
15
12M fwd P/E
CM
P (
Rs.)
19x
4x
7x 10x 13x
16x
Page 110
Unichem Laboratories (ULL) CMP
Rs. 180
Target
Rs. 228
Rating
BUY Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenue 11,334 12,018 13,554 16,037 Revenue 4.9% 6.0% 12.8% 18.3%
EBITDA 1,778 1,013 1,381 2,009 EBITDA 2.0% -43.0% 36.3% 45.4%
Depreciation 457 413 461 502 Adjusted PAT -1.7% -32.2% 7.3% 59.4%
EBIT 1,321 601 921 1,507 Margin ratios
Other Income 253 204 144 144 EBITDA 15.7% 8.4% 10.2% 12.5%
Interest expense 32 30 27 27 Adjusted PAT 9.8% 6.3% 6.0% 8.0%
Exceptional items / Forex gain / (loss) -581 0 0 0 Performance ratios
PBT 1,542 774 1,037 1,624 RoE 14.4% 9.0% 9.0% 13.4%
PAT (after minority interest) 1,693 754 809 1,290 RoIC 13.0% 8.4% 8.5% 12.7%
Adjusted PAT (after MI) 1,112 754 809 1,290 Core RoIC 11.4% 6.5% 7.5% 17.5%
Balance Sheet Fixed asset turnover (x) 1.7 1.7 1.7 1.8
Net Worth 8,167 8,676 9,219 10,086 Total asset turnover (x) 1.0 1.0 1.1 1.2
Total debt 257 220 188 188 Financial stability ratios
Other liabilities and provisions 731 690 509 509 Net Debt to Equity (x) (0.0) (0.0) 0.0 (0.1)
Current liabilities & provisions 2,292 2,101 2,976 2,650 Current ratio (x) 2.7 2.9 1.9 2.1
Total Networth and liabilities 11,446 11,687 12,892 13,433 Inventory and debtor days 129 121 110 115
Gross Fixed assets 6,883 7,262 8,362 9,462 Working capital days 110 102 73 44
Net fixed assets 5,098 5,386 6,026 6,624 Interest cover (x) 0.0 0.1 0.0 0.0
Investments 57 58 58 58 Valuation metrics
Cash and bank balances 578 620 94 1,061 Fully Diluted Shares (mn) 90.5
Other long term assets 0 152 1,028 1,088 Market cap (Rs.mn) 16,258
Current assets 5,713 5,470 5,687 4,601 Adjusted EPS (Rs.) 12.3 8.3 8.9 14.3
Total assets 11,446 11,687 12,892 13,433 P/E (x) 14.6 21.6 20.1 12.6
Cash Flows EV (Rs.mn) 15,937 15,858 16,352 15,385
Cash flows from Operations 698 1,218 1,928 2,552 EV/ EBITDA (x) 9.0 15.6 11.8 7.7
Cash flows from Investing 357 -854 -1,976 -1,160 BV/ share (Rs.) 90.3 95.9 101.9 111.5
Cash flows from Financing -949 -322 -479 -423 Price to BV (x) 2.0 1.9 1.8 1.6
Pharmaceuticals – Initiating Coverage Sector Outlook
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Absolute
Rating
Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year
horizon
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year
horizon SELL Stock expected to fall >10% over a 1-year horizon
Pharmaceuticals – Initiating Coverage Sector Outlook
Overweight Disclaimer (Cont’d)
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